Bears Target Consumer Heavyweight: Options Recap

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Bears were moving in for the kill as a giant consumer staples firm prepared earnings.

Procter & Gamble (PG), after all, has had anything but a strong track record. The parent of brands like Gillette, Pampers and Tide dropped fell after its last three quarterly reports. So it might not be too much of a shock to see what happened in the options market on Monday, less than 24 hours before this morning’s numbers:

  • Roughly 11,000 August 77 puts were bought for $0.36.
  • A matching quantity of August 75s was sold for $0.12.

Known as a bearish spread, the trade cost $0.24 to implement and will expand to a $2 value if PG closes at $75 or lower on expiration. A return of more than 700 percent from the stock moving less than 10 percent? How is that possible?

In case you haven’t visited our Knowledge Center recently, owning puts fix the price where traders can sell a security. Writing puts generates income and creates an obligation to buy if shares fall to a certain level. Combining the two essentially controls a move between two levels — in this case from $77 down to $75 — for a fraction of the difference. That lower cost, in turn, explains the potential leverage.

PG ended the session down 0.41 percent to $80.25 and has lost 13 percent of its value so far this year. The company’s main problems have been increased competition and weaker sales due to slowing retail traffic. Trade worries have been a more recent drag, although activist investor Nelson Peltz has targeted the firm as a value play.

Overall options volume was more than twice the daily average, with puts outnumbering calls by a bearish 5-to-1 ratio.

Procter & Gamble (PG), year-to-date, showing declines after quarterly results.
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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.