EOT Trade Alert – August 5, 2009

Corey Williams | August 5, 2009

August 5, 2009

Trade Alert:

Buy GT Jan 2010 $20 Calls at $2.10 or better (GTAD)

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:

Here’s the skinny on Goodyear. They’ve spent the better part of the last year restructuring the company. And they scored big with a restructured labor deal that’s saving them boat loads of money. The new look Goodyear is a lean and mean operation. They’re in great position to turn a solid profit as the economy improves.

One area that should jump start sales this quarter is new car sales.

See, the Car Allowance Rebate System (CARS), better known as cash for clunkers, is a huge success. If you haven’t seen this program, here’s the rub. The government is handing out $3,500 to $4,500 for consumers to trade in old gas guzzlers for new fuel efficient ones.

The program’s so popular they’ve almost burned through the $1 billion (to purchase 250,000 new cars) in under a week. Auto makers, like Ford, are already revising sales estimates higher thanks to the program. Congress isn’t about to let the party die so early. They’re getting ready to pony up an additional $2 billion to keep the party rolling.

This is great news for the car dealerships, automakers, and their suppliers (like Goodyear).

The January options will keep us in the trade through their next earnings announcement in late October. This will be the next opportunity for management to update their forecast. And all signs are pointing to an improving outlook.

On a technical basis, the stock is trading at a new high for the year and it’s closing in on its 52-week high. It’s trading above the 20-, 50-, and 200-day moving averages.

Trade Details:

Option Ticker Symbol:	GTAD
Underlying Stock Symbol:	GT
Current Bid-Ask Price:	$1.85 – $1.95
Option “Buy Up To” Price:	$2.05
Break-Even On Stock At Expiration:	$22.05
Maximum Risk Per Contract:	$205

Exit Strategy:

GT is trading at $18.12 per share. Resistance levels will be at $22 and again at $25. Remember, we want this stock to move higher. Support levels will be at $14 and $12. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

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