Thursday, May 17, 2012

PG: An ambiguous bear

Procter & Gamble Co. (PG) sells packaged goods for grooming and cleaning. Some well-known brand names in the PG stable are Vidal Sassoon, Cheer, Joy, Pepto-Bismol., Tampax, Mr. Clean, Vicks, CoverGirl, Gillette, Oral-B...

Name the task and the odds are good that the Cincinnati, Ohio company has a household name to match.

PG was among 24 stocks added today to the Zacks top-sell list. The charts on the top-buy list were mainly bearish, and awful. I didn't scan the entire sell list. For bear plays, it's crucial to be able to construct option positions, and that requires high volume.

Two of the 24 stocks had volume exceeding 3 million shares. The top volume, ITUB, sells for only $13 plus change. PG had the next highest volume but is trading in the $60 range.  Generally, I trade stocks selling for $20 or more.

Also, ITUB is a Brazilian company. I have a preference for U.S. shares because there's less currency exchange risk.

ITUB has the more bearish chart -- it has been in free-fall since March. PG hit a plateau at the start of 2010 and has been zig-zagging between $68 and around $60 ever since. it has, in fact, been setting higher highs and higher lows within that sideways range since September 2011.

I'll consider PG as a bearish chart in the face of that evidence for two reasons.

First, the price has approached or touched $68 on two occasions in the past six months: Once in late December and again  for an extended period from February to April. In both cases, it fell back.

Second, although the most recent earnings were 1% above the analyst consensus, the result on the chart was a downside opening gap of 2.6%. The price has sayed within that lower level, from around 63.25 to $64.80, for the ensuing 14 trading days.

However, the price has yet to set a lower low. For that it would need to break below the Feb. 3 low of $62.56.

It's a bearish chart in my view, but one filled with ambiguities. Thankfully, in the world of options positions, there are ways to deal with that. More on that subject below in the "Decision" section.

PG has a return on equity of 18% -- a quite respectable level -- and with long-term debt amounting to 33% of equity -- not the best I've seen, obviously, but not a crippling level.

Institutions own 55% of shares, suggesting only tepid interest, yet the price has been bid up to the point where it takes $2.09 in shares to control a dollar in sales. That could reasonably be called overpriced for a stock sweating in the doldrums.

PG on average trades 11.4 million shares a day. That high liquidity supports a reasonable selectoin of options with four- and five-figure open interest and narrow bid/ask spreads.

Implied volatility stands at 19%, in the lower half of the six-month range. It has been rising since May 11.

Options traders are pricing in a 68.2% chance that the stock will close beetween $60.61 and $67.65 a month from now, for a maximum gain or loss of 5.5%.

Procter & Gamble next publishes earnings on July 30. The stock goes ex-dividend in July for a quarterly payout yielding 3.51% annualized.

Decision for my account: Because of range-bound nature of PG's trading, I would want to construct the position as a vertical option spread that can be profitable both of the stock declines or if it stays in the same range.


I would also want the spread to be profitable up to the top of the present range, which is $65.


There are two ways to build spreads. One way, called theta positive,  gains value as the options approach expiration. The other, theta negative, loses value as expiration approaches.


A theta positive spread meeting my criteria would be to sell the $65 strike June calls and buy the $67.5 strike June calls for a net credit.


A theta negative spread would be buy and sell the same strikes but as puts expiring in October, for a net debit.


Spreads such as these do better with higher volatility levels. PG's are rather low.


Another play, of course, would simply be to buy put options expiring in October, for a net debit, or sell the stock short. In those two cases, however, the stock would have to fall for the position to profit.


I'm passing on PG at this point, mainly because of the ambiguities in the bearish case for the chart. A break below $62.50 would strengthen the case for opening a short position.

Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

No comments:

Post a Comment