Levi Strauss (LEVI) was one of the only well-known names that reported earnings this week ahead of the banks kicking off the season next week. The company beat estimates on both revenue and earnings, posting higher sales while avoiding – perhaps temporarily – excess retailer inventory and slowing consumer spending. The company cited a shift to more casual clothes from the burgeoning remote work crowd.
That makes sense, but why wouldn’t that have applied during the past two years? The stock is on a slide that’s covered 46% in the past 14 months. It’s down 34% this year. And all it could manage after a stellar earnings report was a meager 1% gain after peaking 6.6% higher. More importantly, the shares were soundly rejected by the declining 50-day moving average at the $17.50 level. This trendline has rejected numerous rally attempts, allowing just a handful of closes above it since it turned south in January.
This trade is a bet that LEVI’s downtrend will continue. Earnings and the brief respite they brought are in the past. Now the company must face what all consumer stocks are facing – inflation fears, supply chain issues and a worried customer. Plus, the stock has to contend with its 50-day moving average. Note that the short call of our bearish call spread is 3% above the 50-day, so the stock will have to power through this resistance to move the spread into the money.
If you agree that LEVI will continue its slide under the weight of its 50-day (blue line), consider the following trade that relies on the stock staying below $18 (red line) through expiration in six weeks.
Buy to Open LEVI 19Aug 20 call (LEVI220819C20)
Sell to Open LEVI 19Aug 18 call (LEVI220819C18) for a credit of $0.55 (selling a vertical)
This credit is $0.05 less than the mid-point of the option spread when LEVI was trading at $16.58. Unless the stock drops quickly from here, you should be able to get close to this amount.
Your commission on this trade should be no more than $1.30 per spread. Each spread would then yield $53.70. This trade reduces your buying power by $200 and makes your net investment $146.30 ($200 – $53.70) for one spread. If LEVI closes below $18 on August 19, both options will expire worthless and your return on the spread would be 37% ($53.70/$146.30).