Rockwell Industries is a leader in automation technologies and brands itself as an innovator in electrical power and equipment. IBD Stock Checkup ranks it fifth in its industry group. The company reports earnings Thursday and, as with many other companies, it is expected to present good numbers but deliver weak guidance.
My trading choice for Rockwell stock comes as the share price rises under diminishing volume. This always sends me a cautionary signal, and heading into earnings it seems that traders might be shaken out of these longer positions accumulated at higher prices. This is what we might call the "weak hands": people positioned with more risk than they estimated.
The stock holds a Composite Rating of 89, and the industry group rank is 82nd out of 197. The stock surprises to the upside regularly on its earnings reports, but it is the guidance we must watch for. The market is a forward-pricing mechanism and it is always looking at the potential of future returns.
Rockwell Stock Price Action Draws Suspicion
Prices have been rising since June, but the last several weeks have shown notable differences on selling days vs. buying days. Down days have been of larger percentage than the up days. This is another warning that traders are taking profits into new highs while fewer are entering the stock.
This tells me that this powerhouse (pun intended) will likely come back to rest at levels of support near 225. (See chart below.) The catalyst for a potential move down in Rockwell stock will obviously be the earnings report.
The Cboe Market Volatility Index (or VIX) continues to fade into levels not seen in months and shows little sign of lifting at this juncture. The low reading continues to concern me and will make me size a position smaller than I would normally choose.
For the trading strategy, we have two choices and I will use both. But if you are newer or learning the ropes you can take either of them. If you are an experienced options trader, you can "leg" into the position, meaning you enter each piece at a different time.
Identify Key Chart Levels
First, let's a look at key chart levels. Buyers have been running the show, still pressing higher but with less participation. The stock is sitting near 290, a resistance level from March of 2022 (1). So the lines of prices that keenly interest me are the resistance stated and the support before the last big breakout around 220 (2).
My preference is always to sell premium in low-volatility readings, like when the VIX is below 35. Once the VIX moves above 35 to 40, we must reconsider risk because the range of prices will expand and we will move to buying premium rather than selling it.
Looking at the March option chains, we can see that someone has positioned a spread with 1,500 puts at both the 250 and 220 strikes — a likely spread to buffer any move. Since the market is down today, this spread may be worth twice what the current price of $3.30 is. I am somewhat uncomfortable with the short strike at 250 because support is closer to 230.
The call option chains do not show this kind of positioning.
The Short Call And Put Spreads
Set up the trade — called an iron condor — this way:
Sell to open the March 17 monthly 270 calls and buy to open the March 17 monthly 290 calls. Currently this is showing a $10.45 credit. Consider $8.90 as the floor for how much you want to collect for this spread. The premise is that the chart will not move past 285.
Sell to open the March 17 monthly 240 puts and buy to open the March 17 monthly 220 puts. Consider $2.20 as the floor for how much you want to collect with this spread. The premise is that the chart will not fall below 230.
If this setup looks familiar, you will remember it as the iron condor. As of this writing, the premium for March's expiration is $11.80. The goal would be to allow this premium to erode to 50% of its value and then remove the exposure if the price is at the top or bottom of the range with increasing volume.
Possible Scenarios For Rockwell Stock Option Trade
What could happen:
- The stock moves within and potentially beyond the range but returns to rest above 230 and below 280 by expiration, which would yield the full profit.
- The stock moves into my 50% profit line – when the position is worth around $5.50 – and I exit the trade.
- The stock rallies and moves over 287 with volume for more than three days. This means we must exit because the chart is breaking out.
- The stock fades and moves below 230 with volume for more than three days. This means we must exit because the chart is in a breakdown.
The short iron condor is a common tool for time decay to create revenue stream. However, I rarely hold these into the expiration but instead will look for 40%-50% of the position to erode and then exit. More than often, this allows me to consistently manage my profit.
You can find Anne-Marie Baiynd on Twitter at @AnneMarieTrades
