MQG - time for a close watch

MQG's share price has been falling from a high of $41.95 after its earnings downgrade in early February. At the current price of $36.45 (7 Mar 2011), that is almost a $5.50 fall or 13%. Perhaps the lower earnings is now reflected in the share price?

Based on our chart analysis, there may be another 90c to go. The level to watch is $35.57. If that holds, we will be piling in to the stock.

Why so? Our analyst is still expecting a 15% ROE from MQG within 3 years. What's more exciting is its upcoming dividend, expected to be around $1 early May.

To take advantage of this weakness in the stock and to be positioned for the upcoming dividend, options investors can look to sell April puts.

For those who are conservative, the April $35.50 strike is giving about 84c now, should the stock weakens another 90c, you could be looking at around $1.15 per contract on this strike.

For those who are even more conservative and want downside protection on a volatile stock (may be a wise thing to do anyway), in addition to the trade above (the selling of the April $35.50 put) buy a lower April put for protection as well.

For an investor who is willing to accept a $1.50 maximum downside, then buy the April $34 put for protection and the combined income for these two legs (selling of $35.50 and buying of $34) will still generate about 50c credit income per contract.

Summary:
Sell April $35.50 put and buy April $34 put for a combined credit of $500 per contract.

Exposure is the potential purchase of 1,000 underlying MQG shares at $35 with downside protection to $34.

Those who are only interested in a trade, the maximum exposure is $1.50 per combined trade with the earning of $500 income per bull put spread.