Hewlett-Packard Rewards from a Position of Strength, Buy HPQ Call Options

Hewlett-Packard Company (NYSE:HPQ) has the floor today as we examine midweek contrarian option trades. Hewlett-Packard with its market capitalization of $56.58B is a global provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses (SMBs) and large enterprises, including customers in the government, health and education sectors. The company is concerned with the areas of security, cloud, mobility and big data.

My last coverage of Hewlett-Packard was in October 2014 after the company announced plans to split into two separately listed companies.  In the said post, I gave the stock a $40 price target by January 2015. Interestingly, Hewlett-Packard reached that $40 price target in January and I think that it is high time we took another look at the stock today.

Shares of Hewlett-Packard are doing wonderfully well today as the stock sports a 0.61% trading gain to $31.35 as at 2:55PM EDT today. The gains recorded in the shares of Hewlett Packard today can be traced to the positive analyst recommendation on the stock as it was upgraded from a “hold” rating to a ‘Buy’ at Jefferies.

A Critical Look at Hewlett-Packard’s Position

HPQ Chart

The chart above, with my annotations shows how the shares of Hewlett Packard have traded within the last one year. In the last one year, the shares of Hewlett-Packard have gained 32.45% from a 52-week low of $31.03 to a 52-Week high of $41.10 as shown by the blue arrow.

Another interesting point is that the shares of Hewlett-Packard have mostly traded within a triangle as shown by the base line, which is also the support at $31. Most interesting is the fact that the shares of Hewlett-Packard have traded with a head and shoulder pattern in the last six months and I am most interested in the stock’s head and shoulder pattern.

Hewlett-Packard has  a head at the 52-Week high of $41.10 and you can see the shoulders very close to the neck line of $31 which also happens to be the support level for the stock. I am joining the Street’s optimism on Hewlett-Packard and I don’t think that the optimism is misplaced, judging by the RSI of 29.20, which suggests that the stock is seriously oversold. The “Buy” action in the stock has started showing strong momentum in the last couple of days as the stock’s RSI had risen steadily in the last three sessions.

Rewarding Shareholders from a Position of Strength

On March 20, Hewlett-Packard announced its decision to increase its quarterly dividend by 10% to 17.7 cents up from $0.16 per share. The dividend hike raises Hewlett-Packard’s annualized dividend to 70.4 cents per share in line with the company’s history of consistently rewarding its shareholders. Hewlett-Packard has consistently raised its quarterly dividend in the course of the last 50 years from $0.078 per share in 1965.

As at the end of Q4 2014, Hewlett Packard has rewarded shareholders by paying $304 million in dividends. In addition, the company repurchased shares worth $1.57B within the same period.  I strongly believe that the consist rewarding of shareholders attests to Hewlett-Packards secure financial position as the company boasts cash and cash equivalents of $12.92B in the recently concluded quarter.

How to Trade HPQ

Analysts and investors should be optimistic about the prospects of Hewlett Packard despite the fact that the stock has mostly traded down in the year-to-date period. I take the contrarian position on HPQ and I recommend buying HPQ call options. The shares of Hewlett-Packard are now in an uptrend as I have mentioned earlier and this might be a very good chance to pile up on HPQ call options. I recommend the HPQ Aug 2015 35.000 call (HPQ150821C00035000) at an asking price of $0.72

— Daily Option Alerts

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