Bearish call roll in consumer giant: Options report

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So much for safe havens.

After all, that’s what consumer staples are supposed to be. In theory, their stable businesses generate predictable cash flows. That lets investors sleep at night, comfortable in their dividends and steady-eddy results.

But what happens when their sales become less stable? What happens when rising interest rates make their dividends less appealing? What happens when changes in shopping habits drain the once-impregnable moats around their products and allow lower-priced competitors into their castles?

You get Procter & Gamble’s (PG) last earnings report, that’s what. The owner of brands like Gillette razors, Tide detergent and Pampers diapers cratered to its lowest price in more than two years last week after a glut of unsold inventory forced management to scale back price increases. It was the company’s second consecutive disappointing quarterly report.

Yesterday, options traders stuck with the bearish trend by apparently rolling a downside position:

  • About an hour before the closing bell, a block of 10,233 May 75 calls was sold for $0.48.
  • A matching number of May 85 calls was bought for $0.03 at the same time, but volume was below open interest. That suggests an existing short-call trade was closed at the higher strike and rolled lower.

In case you haven’t been to TradeStation’s Knowledge Center recently, calls fix the price where investors can buy a stock. Shorting them is a high-risk strategy with potentially infinite losses should the stock rally. It looks like they sold the 85 calls and made money as the contracts dwindled in value. He or she then bought those back and sold more at the lower strike, netting an additional $0.45 of income. Their maximum profit will occur if PG closes below $75 on expiration on May 18.

PG fell 1.08 percent to $73, and has lost one-fifth of its value this year. The transaction pushed total option volume in the stock to twice the daily average.

Procter & Gamble (PG)
Procter & Gamble (PG)
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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.