August 30, 2011 at 11:38 AM EDT
Plow Ahead With This Agriculture ETF
Last week's stock surge suggests agricultural commodities may be back in play. Get the trade.
After experiencing a monster run in the back half of 2010, the PowerShares DB Agriculture Fund (NYSE:DBA) has spent much of 2011 digesting gains. Since last week’s stock surge was accompanied by bullish activity in agricultural commodities, the ETF is finally signaling that a resumption of its longer-term uptrend maybe at hand. While a short-term pullback could be in the cards, the weekly chart looks like it wants higher over the coming months (On Tuesday, DBA was off 0.7% to $33.96).
One of the simpler bullish option plays – and one that seems like a good fit for DBA — is the purchase of a debit call spread, sometimes referred to as the bull call spread. The position is constructed by buying to open a lower strike call and selling to open a higher strike call in the same expiration month. The sale of the higher strike call hedges off a large portion of the time decay and volatility risk of the long call option. The risk is limited to the debit paid and the potential reward is the distance between the strikes minus the debit.
One bull call spread worth consideration is the January 2012 33-36 spread. To enter the position, buy to open the 33 call while selling to open the 36 call. With a current value around $1.30, the maximum risk is limited to $130 and the potential reward maxes out at $170. By going out to January, traders give DBA ample time to stage a move above $36.
At the time of this writing Tyler Craig had no positions on DBA.
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