06
Apr
2011

DARK HORSE TRADERS' HEDGE: Exposure to MERC

Exposure to MERC

by Scott Brown, President, Sabrient

Here I come again now baby
Like a dog in heat
Tell it’s me by the clamor now baby
I like to tear up the street
And I been smokin so long,
Ya know I’m here to stay
Got you in a Stranglehold baby
You best get out of the way

Sometimes you wanna start high
And sometime you gotta start low
Some people think they gonna die some day
I got news you never gotta go

Stranglehold by Ted Nugent

Mercer International Inc. (MERC) is a stock that I believe is primed and ready for an upside move.  "Sometimes you wanna start high" which is the case with MERC, as we are buying high to go higher.  MERC is currently trading at $14.58 and has approached the 52-week high of $15.27 intra-day.  For the chartist out there, MERC has a very nice 12-month chart with long basing periods and then breakouts.  MERC has been on Sabrient’s top stocks for several weeks now due to the fundamentals.

A Bull Call Spread is a good tool for gaining exposure to a stock position which an investor believes has upside potential.

Recommendation: (Assuming $1,000 investment)

Sell 3 MERC Nov $12.5 puts at the market, Wednesday April 6, 2011 (MERC111119P00012500)

Buy 3 MERC Nov $10 calls at the market, Wednesday April 6, 2011 (MERC111119C00010000)

Fourth quarter earnings grew 13-fold as pulp prices took off around the world.  During 2010, pulp revenues were up 48% and emerging markets such as China, Russia and India are giving a nice tail wind to future growth. 

Analysts have been raising estimates and price targets for MERC in recent weeks.  Obviously, one tool for gaining exposure to a stock you want to invest in is simply to purchase the shares for $14.58, but I prefer  using the Bull Call Spread which allows investors to gain the upside exposure for less capital invested.

The Bull Call Spread is accomplished by selling the Nov $12.50 put (approximately $1.60/contract) and buying the November $10 call (approximately $5.60/contract).

Using this strategy the investor gains upside exposure to the number of shares (remember that each option contract is equal to 100 shares) for a net investment of $4, rather than buying the shares for $14.58.

Dark Horse Trader’s Hedge

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

Dark Horse Traders' Hedge
sbrown / Tag: DARKHORSETRADERSHEDGE, MERC, Options /