EOT Trade Alert – July 14, 2008

Corey Williams | July 14, 2008

July 14, 2008

Trade Alert:

Bearish Put Buy GT January 2009 $15 Puts at $2.35 or better (GTMC)

Company Background:

The Goodyear Tire & Rubber Company (GT) I’m sure needs no introduction. They make tires and related products and sell them worldwide. Their tires are used on automobiles, trucks, buses, airplanes, motorcycles, farm, earthmoving, and industrial equipment. The company also operates tire and auto service center outlets which sell tires at retail and provide automotive repair and other services.

Short-Term Catalyst:

So here’s the scoop on Goodyear. For the first time in decades Americans are driving their automobiles less. It only took $140 oil and $4 gas to reach this point.

That’s not the only change. Americans are starting to buy smaller more fuel efficient vehicles.

Neither of these changes bode well for Goodyear.

See 70% of their sales are in the replacement market. The less people drive the less wear their tires experience. That means fewer new tires are needed. With the weakening economy, the incentive to try and drive a few more miles on worn out tires increases.

We’re also seeing a huge drop-off in the purchase of new vehicles – thank falling consumer confidence and tightening credit markets. A big portion of the new tires Goodyear sells goes to the auto manufacturers. The fewer cars they sell, the fewer tires Goodyear sells.

Now the large vehicles and SUVs that were all the rage a few years ago are being shunned. This presents another problem as those larger tires were the more profitable products in Goodyear’s line. Clearly as the product mix shifts towards smaller tires for smaller vehicles, profit margins will suffer.

But wait, there’s more.

Input costs are increasing. A significant portion of every tire – even the synthetic ones – are made from oil. Oil prices as you know are going up and up, further squeezing margins.

The company is trying to combat these challenges. But they’ll no doubt experience a bump in the road along the way (sorry I couldn’t resist).

The company is expected to announce second quarter earnings towards the end of the month. This will be an opportune time for management to adjust future expectations, or discuss problems in the market. I’d expect some form of bad news to drive the stock lower.

On a technical basis, the stock is trading at new lows. I’m expecting it to continue falling. I don’t think all of the bad news is priced into the stock. GT shares are trading well below the 50 and 20 day moving averages.

Trade Details:

Option Ticker Symbol:	GTMC
Underlying Stock Symbol:	GT
Current Bid-Ask Price:	$2.05 – $2.15
Option “Buy Up To” Price:	$2.35
Break-Even On Stock At Expiration:	$12.65
Maximum Risk Per Contract:	$235

Exit Strategy:

GT is trading at 17. The stock is touching on new 52-week lows. Support levels will be at the psychological points of 15 and 12.50. Remember, we want the stock price to fall. Resistance levels are 20 and 22.

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