Cummins (CMI) 11/20/09 PriceWatch Alert Up To 9.11% Downside Protection

Posted: Friday, November 20, 2009 8:37 AM EDT
By: Market Intelligence Center Staff

Cummins (NYSE: CMI) closed yesterday at $47.18. So far the stock has hit a 52-week low of $17.70 and 52-week high of $51.65. Cummins stock has been showing support around 46.07 and resistance in the 48.35 range. Technical indicators for the stock are Bullish and S&P gives CMI a neutral 3 STAR (out of 5) hold rating. CMI appears on the Investors Observer Volume Leaders list. For a hedged play on this stock, look at a Mar '10 48 covered call (CDM CE) for a net debit in the $42.88 area. That is also the break even stock price for this trade. This covered call has a 120 day duration, provides 9.11% downside protection and an 11.94% assigned return rate for a 36.32% annualized return rate (comparison purposes only). A lower cost hedged play for this stock would use a longer term call option in place of the covered call stock purchase. To use this strategy look at going long the CMI Jan '11 22.50 Call (VBE AX) and selling the Mar '10 48 call (CDM CE) for a $21.20 debit. The trade has a 120 day life and would provide 7.38% downside protection and a 20.28% assigned return rate for a 62.00% annualized return rate (for comparison purposes only). Cummins has a current annual dividend yield of 1.44%. [FBB-Seven Summits Research]