How ETN Could Benefit from Pent-Up Pessimism

Betting on Eaton stock's next move higher with options could be a prudent play, too

Feb 17, 2021 at 2:05 PM
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Eaton Corporation (NYSE:ETN) has been on a steady tear higher, doubling from its March coronavirus-induced lows. Now, after a pullback to support at the 40-day moving average, it looks like ETN is poised to add to its 19% year-over-year gains.

ETN feb 17

Analysts are mostly hesitant on Eaton Corporation stock, even after the company's Feb. 2 earnings and revenue beat. More specifically, seven of the 13 in coverage carry a "hold" rating on ETN, leaving plenty of room for increased optimism that could push the stock higher.
 
There is some pessimism in the options pits as well, per ETN's 10-day put/call volume ratio of 1.23 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio stands higher than 60% of readings in its annual range, suggesting puts have been picked up a slightly quicker-than-usual clip during the last two weeks.

That said, speculating on ETN's next move with options could be a prudent play. The stock's Schaeffer's Volatility Index (SVI) of 25% stands higher than just 7% of all other readings in its annual range, implying that options players are pricing in relatively low volatility expectations at the moment. Lastly, Our recommended call has a leverage ratio of 7.6, and will double in value on a 12.1% rise in the underlying security.

Subscribers to Schaeffer's Weekend Trader options recommendation service received this ETN commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters. Learn more about why Weekend Trader is one of our most popular options trading services.

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