EOT Trade Alert – December 9, 2011

| December 9, 2011

December 9, 2011

Trade Alert:

   Buy TRV April $60 2012 Calls at $2.00 or better

Company Background:

The Travelers Companies (TRV) is one of the largest insurance companies in the world.  They offer general auto, homeowners and small business insurance.  However, their largest insurance premiums come from large commercial buildings, construction companies, and even the large banks.

Short-Term Catalyst:

Up, down, and around she goes.  The stock markets are giving many investors a bad case of indigestion.  It’s certainly making it tough to find good call buying opportunities.

But one industry is gearing up for a big rally.  I’m talking about property and casualty insurance companies.  And Travelers is the best of the bunch.

What’s more, we have a golden opportunity to get long Travelers at discount prices.

Let me tell you why…

Over the last six months, devastating weather has ripped across the country.

At the end of August, Hurricane Irene pounded the East Coast.  And not just once. First, it made landfall in the southern part of the East Coast.  Then a day later, Irene made its second landfall in southern New Jersey, the first hurricane to make landfall in New Jersey since 1903.

And if that wasn’t bad enough, a week later, Tropical Storm Lee punished the Gulf of Mexico.  It dumped heavy rain and caused massive destruction to homes and business alike.

As a result, Travelers was forced to pay out a fortune in claims.  In fact… they paid more than double their normal expected yearly losses for the hurricane season.

Of course, the news sent TRV shares spiraling down by about 17%.

Here’s the thing, while amateur investors sold the company, savvy investors held on. They know big insurance companies never miss an opportunity to raise premiums.  And big natural disasters are just like that… an opportunity to boost premiums.

In fact, Travelers announced they’re raising premiums across the board by up to 4% in the months to come.  Of course, higher premiums will lead to revenue and earnings growth.

And I’m not the only one who thinks so… Travelers management recently said they’ll continue their massive stock repurchase program.  They’re in the process of buying back $1 billion worth of shares by the end of the year.

That’s what I love to see.  Management must believe the stock has big upside potential.  They certainly wouldn’t buy back shares if they thought they were too rich at these prices.

Let’s grab call options to profit from the coming rally in Travelers.  When the herd rushes back in, we’ll be sitting pretty.

Trade Details:

Underlying Stock Symbol: TRV
Current Bid-Ask Price: $1.55 – $1.70
Option “Buy Up To” Price: $2.00
Break-Even On Stock At Expiration: $62.00
Maximum Risk Per Contract: $200

Exit Strategy:

TRV is trading at $55.53 per share.  Resistance levels will be at $57.50 and again at $61.  Don’t forget, we want this stock to move higher.  Support levels will be at $54 and $49.  Conservative investors should look to exit at the first support or resistance level.  Aggressive investors may want to hold for a bigger move.



Category: EOT Trade Alert

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