Back on June 17th I made a bearish near term case for shares of Proctor & Gamble (PG), highlighting stretched valuation, unusually high investor sentiment despite dollar headwinds and impediments to growth in key overseas markets, with the stock chart at an inflection point with cheap options prices. In a very quick way I was wrong on direction from that inflection point. Since the initiation of this trade investors shook off dollar concerns and continued to flock to sectors like consumers staples with attractive dividend yields and the defensive nature of their products. Here was the trade from two weeks ago:
PG ($83) Buy Aug 82.50 / 70 Put Spread for $2
-Buy to open 1 Aug 82.50 put for 2.25
-Sell to open 1 Aug 70 puts at 25 centsBreak-Even on Aug expiration:
Profits: up to 10.50 between 80.50 and 70 with max gain of 10.50 at 70 or below
Losses: up to 2 between 80.50 and 82.50 with max loss of 2 above 83
Rationale: This is essentially an at the money put purchase at a decent vol level that captures an earnings event. The sale of the 70 puts benefit from a great deal of downside skew. Even if the target of 70 seems aggressive those are a good sale against any higher put purchase. If the stock breaks out of its range to the upside this trade can be closed for not too bad of a loss and we’ll use that level of 85 as an upside stop. On the downside we can be patient on any breaks below 80.
As you can see we highlighted a stop at $85, which the stock has broken above today or the first time since early 2015. I am now going to cut my loses as my thesis was clearly wrong and will look to recoup as much premium as possible as the break-even on the put spread is now $5 below where the stock is currently trading:
Action: Sold to Close PG ($85.65) Aug 82.50 / 70 put spread at 80 cents for a $1.20 loss
Regular readers know we generally like to keep a 50% premium sell stop on long premium directional trades. Well while only a mental stop, this one is clearly elected with a very impressive technical breakout and market dynamics that could keep stocks like PG bid.