November 28, 2022
Medical-device maker Medtronic (MDT) reported earnings this week that hardly impressed the Street. Quarterly sales and earnings fell from a year earlier, with revenue falling short of analyst expectations while profits met projections. The company also cut its full-year guidance, citing the usual supply-chain disruptions and a slower recovery in medical procedures postponed due to the pandemic.
MDT’s report was met with a couple of downgrades along with a heavy dose of target price declines. Nevertheless, the average price target sits above $94, about 19% higher than Friday’s close. That leaves room for more price target cutbacks.
The stock price has been sliding from more than a year, falling 42% from a record high reached in Sep. 2021. Since April, MDT has displayed a pattern of lower highs and lows with the 50-day moving average keeping a lid on brief rallies. The 50-day currently sits at $83, which is also the strike of the short call in our credit spread. This trade is thus based on the current downtrend continuing, with the declining 50-day providing resistance and keeping our spread out of the money.
If you agree that MDT will continue to trade beneath the 50-day moving average (blue line), consider the following trade that relies on the stock staying below $83 (red line) through expiration in six weeks:
Buy to Open the MDT 6 Jan 85 call (MDT230106C85)
Sell to Open the MDT 6 Jan 83 call (MDT230106C83) for a credit of $0.40 (selling a vertical)
This credit is $0.03 less than the mid-point price of the spread at Friday’s $79.12 close. Unless MDT falls quickly, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $38.70. This trade reduces your buying power by $200, making your net investment $161.30 per spread ($200 - $38.70). If MDT closes below $83 on Jan. 6, both options will expire worthless and your return on the spread would be 24% ($38.70/$161.30).
November 21, 2022
Down Goes Tyson
Tyson Foods (TSN) can’t seem to get out of its own way. The company reported earnings on Nov. 14 that missed estimates on profits but beat on revenue. Higher chicken prices squeezed gross margins, which were cut in half.
But TSN has other problems. The week before earnings, the company’s CFO was arrested for public intoxication and criminal trespass. This week, the company recalled 94,000 pounds of ground beef that reportedly contained a “reflective, mirror-like material,” whatever that means.
Analysts didn’t seem to like the earnings news, as the stock was hit with a few target price downgrades. Even so, the average price target is 24% above Friday’s close, which seems overly optimistic. Perhaps the options market is more in touch with TSN’s prospects, as out-of-the-money puts are priced higher than the corresponding calls.
The stock traded lower after earnings and throughout the week, falling nearly 3%. While hardly catastrophic, the more bearish development is the continued resistance provided by the 50-day moving average. The stock hasn’t closed a day above the 50-day since it crossed below it in early August. Moreover, recent rally attempts in the past couple of weeks were firmly rebuffed.
This trade is based on TSN continuing to trade sideways or lower beneath the weight of the 50-day moving average (blue line). Note that the short call strike (red line) of our credit spread lies just above this trendline, meaning that TSN will have to overcome this resistance to put our spread in danger
If you agree that TSN will continue to trade beneath the 50-day moving average, consider the following trade that relies on the stock staying below $67.50 through expiration in four weeks:
Buy to Open the TSN 16 Dec 70 call (TSN221216C70)
Sell to Open the TSN 16 Dec 67.5 call (TSN221216C67.5) for a credit of $0.50 (selling a vertical)
This credit is $0.02 less than the mid-point price of the spread at Friday’s $65.52 close. Unless TSN falls quickly, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $48.70. This trade reduces your buying power by $250, making your net investment $201.30 per spread ($250 - $48.70). If TSN closes below $67.50 on Dec. 16, both options will expire worthless and your return on the spread would be 24% ($48.70/$201.30).
November 14, 2022
Oil and gas producer Diamondback Energy (FANG) – which may have the best ticker symbol in finance - reported earnings on Monday that beat analyst expectations on both the top and bottom lines. Higher oil prices led to huge jumps in net income (+82%) and revenue (28%) compared to a year earlier. For the record, the average price of oil jumped 32% from last year’s third quarter.
Analysts were bullish on the results, reacting with several price target increases. The average price target now stands 9.6% above Friday’s close, which seems reasonable for an energy stock.
FANG had traded mostly flat in 2022 … until late September. That’s when the stock went on a major rally that has covered 48% in just seven weeks. In fact, a late-week surge allowed the stock to post all-time intraday and closing highs on Friday. The stock has been riding above the support of its 20-day moving average since closing above this trendline in early October.
This trade is based on FANG continuing its rally or at least not pulling back below the 20-day (blue line), which will cross above the short strike of our put spread (red line) within the next couple of days. Note that FANG’s strike prices are unusual (155.35 and 152.7), though that should have no impact on the trade or profit potential.
If you agree that FANG will continue to respect the 20-day moving average, consider the following trade that relies on the stock staying above $155.35 through expiration in five weeks:
Buy to Open the FANG 16 Dec 152.7 put (FANG221216P152.7)
Sell to Open the FANG 16 Dec 155.35 put (FANG221216P155.35) for a credit of $0.75 (selling a vertical)
This credit is $0.05 less than the mid-point price of the spread at Friday’s $164.35 close. Unless FANG surges quickly, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $73.70. This trade reduces your buying power by $265, making your net investment $191.30 per spread ($265 - $73.70). If FANG closes above $155.35 on Dec. 16, both options will expire worthless and your return on the spread would be 38% ($73.70/$191.30).
Thursday, November 24th. Market closed for Thanksgiving
Friday, November 25th. Market closes early at 1:00 p.m. ET
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