from the desk of Dr. Terry F Allen

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Amid the giddiness over solid earnings from the big banks, you may have missed the lousy earnings report from insurance giant Progressive (PGR) on Thursday morning. Earnings plunged 90% from a year ago and fell 10% shy of estimates. Revenue came up a billion dollars short of expectations. The company also swung to a loss in September due to payouts for Hurricane Ida. Analysts apparently weren’t paying attention, as there were no upgrades, downgrades or target price changes issued after the news.

The stock didn’t do much after the report, falling less than a percent on Thursday. On Friday, the shares gained that all back – and more – and closed right on their declining 20-day moving average. Despite the rebound, PGR has been trading sideways for three weeks after suffering a 6.2% drop in September that was guided by the 20-day. All relevant moving averages sit at or above the stock price, ready to lend resistance. We are therefore playing a bearish call credit spread with the short call sitting above PGR’s 20-day moving average.

If you agree that PGR will struggle with its 20-day moving average (blue line in chart) line in chart), consider the following trade that relies on the stock remaining below 92.5 (red line in chart)  (through expiration in five weeks.

Buy to Open PGR 19Nov 95 call (PGR211119C95)
Sell to Open PGR 19Nov 92.5 call (PGR211119C92.5) for a credit of $0.80 (selling a vertical)

This credit is $0.05 less than the mid-point of the option spread when PGR was trading at $91.25. Unless the stock falls quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $78.70. This trade reduces your buying power by $250 and makes your net investment $171.30 ($250 – $78.70).  If PGR closes below $92.50 on November 19, both options will expire worthless and your return on the spread would be 46% ($78.70/$171.30).

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