It’s déjà vu all over again with the White House announcing tariffs against Mexico, Canada and China earlier this month. As Money Morning’s Chris Johnson stated, the “last significant instance of the U.S. imposing 25% tariffs was during the Trump administration in 2018.” Finally, though, the economy is showing signs of strain. Nevertheless, a rare few enterprises like Eaton Corporation (NYSE:ETN) could come out of the mess in a net favorable position.
To be completely upfront, the idea of betting on ETN stock carries significant risks. Further, it’s practically impossible in the current globalized economy to find purely insulated organizations. After all, supply chains are inherently international, with U.S.-based factories important raw materials, components or technology from other parts of the world. Eaton, a leader in power management solutions, is no exception.
Most notably, the AP reported that U.S. consumer confidence plunged in February, suffering the biggest monthly decline in more than four years. Further, the publication noted that the drop represented the biggest month-to-month decline since August 2021. With investors bracing for an ugly trade war, the equities market slipped on Tuesday.
Included in the malaise was ETN stock, which fell 7.51% in the trailing five sessions. Still, from a fundamental perspective, Eaton could position itself to be a net winner. Earlier, the company supported U.S. domestic preference goals, specifically cooperating with the Build America, Buy America Act.
Plus, Eaton commands 253 U.S. manufacturing sties and hires over 26,000 American workers. It’s a cornerstone of domestic industrial growth. As President Trump’s policies pivot toward self-reliance and infrastructural expansion, Eaton already stands in a favorable position. With the tariffs, higher costs for foreign competitors could translate to net pricing power for the industrial specialist.
While ETN stock presents intrigue as a long-term investment, it could also be an enticing prospect for options traders. One key advantage is that the security benefits from an upward bias. Using data from January 2019, a position entered at the beginning of the week has a 58.9% chance of rising by the end of it. Over an eight-week period, this baseline probability rises to 68.15%.
However, stocks don’t trade in a mathematical vacuum. Rather, they tend to respond more aggressively to fundamental stimuli, such as tariff fears. As stated earlier, ETN stock lost 7.51% over the past five sessions. Historically, there have been 15 times when ETN lost between 5% and 10% in a one-week period. Overwhelmingly, investors have demonstrated a strong tendency of buying the dips.
In the subsequent week following sizable volatility, the dynamic probability — or the probability accounting for the unusual volatility — rises to 73.33%, much higher than the baseline probability of 58.9%. In the second subsequent week, the long odds are almost 67%, again higher than the baseline for that timeframe.
Assuming the positive scenario, the median return that investors have historically seen two weeks following sizable volatility is 5.55%. That would translate to an upside target of $303.52 based off Tuesday’s close of $287.55.
Aggressive traders may consider the 295/300 bull call spread for the options chain expiring March 7. This transaction involves buying the $295 call and simultaneously selling the $300 call. Should ETN stock rise to or above the short strike price at expiration, the trader would collect the maximum payout, which at time of writing stands at 170.3%.
