Trade Update $PG: Closing Feb Put Spread For a Double

by Dan January 27, 2015 9:38 am • Commentary

Yesterday we made a bearish play into PG’s Q2 results reported this am (read below).  With the stock down after the miss we are going to take the quick profit and move on. But this is a theme we want to stick with, company’s with high overseas exposure, weak sales and high valuations:

Action: Sell to close PG ($86.70) Feb 89/85 put spread at $2.00 for $1.00 profit

We got the move we wanted and will take the money and run. The stock could obviously have more room to the downside here but we’d prefer to keep following this theme in other stocks.



Original Post Jan 26th, 2014: New Trade $PG: WKRAP in Cincinnati

Procter & Gamble (PG) reports their fiscal Q2 results tomorrow before the open, the options market is implying about a 1.7% one day move which is a tad shy of the 1.9% 4 qtr avg.

Last Tuesday there was a large options trade that caught my eye in front of earnings, from our Notable post:

PG saw a large bullish roll when the stock was 91.30, a trader sold 9600 March 87.50 calls at 4.45 to close and bought 9600 March 90 calls for 2.60 to open. PG reports Q4 on Monday Jan 27th prior to the open, the implied move is only about 1.5% vs the 4 qtr avg of about 1.9%, which seems cheap, especially when you consider JNJ is was down 3.5% at one point following its results yesterday and closed down 2.6%.

As regular readers know we don’t place to heavy of emphasis on unusual options activity as we have no idea what the investors intent is and what underlying position they may be trading against.  But I can tell you that if I wanted to be long this stock, for reasons other than capturing its 2.9% dividend yield, then I would also look to define my risk. Why? Well, they’re a home products company that gets about 60% of their sales outside North America, meaning they have tremendous exposure to the rising dollar, and weak global growth.

Also PG trades at 21.5x fiscal 2015 earnings that are expected to decline 2% year over year on a 5% sales decline. What are investors paying for? The dividend yield?  Makes no sense to me!:

PG 7yr P/E from Bloomberg
PG 7yr P/E from Bloomberg

Technically the stock just broke near term support at $90, that also corresponds with the uptrend that has been in place from last year’s lows:

PG 6 month chart from Bloomberg
PG 6 month chart from Bloomberg

Options prices in weekly expirations look dollar cheap for those with a directional bias.  I would add that there have been some large companies that generally don’t see large stock movements outperform their implied moves in this cycle, like JPM, JNJ and UPS.   I suspect that worse than expected news could send shares of PG down more than the $1.5 implied move.

To sum up, stock is expensive to itself and the market, there is no growth and headwinds of strong dollar and weak global growth should weigh on guidance. The technicals are poor and the options market does not expect movement. So let’s take the other side of that bet!

TRADE: PG ($89.30) Bought Feb 89/85 put spread for $1

– Bought to open 1 Feb 89 put for 1.30

– Sold to open 1 Feb 85 put at .30

 Break-Even on Feb Expiration:

Profits: gains of up to 3 between 88 and 85, max gain of 3 below 85

Losses: of up to 1 between 88 and 89 max loss of 1 above 89

Rationale – This trade is a dollar cheap way to play for a significant move that the options market clearly isn’t suspecting. Obviously, the direction could be wrong and this will be a quick loss if so, but if it’s right, the risk reward of only 1% or so of the stock make sense in the event of an out-sized move.