Last week, some commentators in options trading noted that Procter & Gamble (PG) has been a bit hot given that the blue chip in the Dow Jones Industrial Average has outperformed its peers considerably.
Another options trading expert, meanwhile, suggested a bearish trade in PG stock; we call it a diagonal put spread.
How does one set up this bearish option trade?
It involves buying a Jan. 15-expiring monthly put option with a strike price of 145 for around $6.25 and selling a November 140 strike put for $2.25.
The total cost of the trade is the net premium paid, estimated to be around $4 a share — or $400 for a standard contract of 100 shares.
The strategy earns the most profit if PG stock closes right at 140 at November expiry, where the profits are estimated to be around $330 per contract. If PG stock drops even further, the trade will still make around $100. This is the lowest profit if the stock drops and it doesn’t matter how far it drops.
This value can be calculated by taking the difference in the strike prices ($5 per contract) and subtracting the premium paid ($4), then multiplying by 100.
PG Stock: Why You Desire More Volatility Here
An increase in implied volatility could also help the trade as the bought put has positive vega (an option’s price sensitivity to changes in the volatility of the underlying asset). This simply means that the option price will rise if volatility rises, with all other factors being equal.
If traders continue to be bearish on PG stock after the Nov. 20 contract expiration, they can sell another monthly put or simply hold the long put, the cost of which will have been reduced by the premium received for any sold options.
Despite an impressive stock performance over the past few months, PG stock is not among the top-rated stocks. However, a Composite Rating of 88 on a scale of 1 to 99 is not shabby.
Procter & Gamble also owns an EPS Rating of 83 and an RS Rating of 75, according to IBD Stock Checkup. The Cosmetics/Personal Care Group Rating is only rated C+, as seen not only on Stock Checkup but also the fundamental block in the PG daily chart on MarketSmith.
P&G reports earnings on Tuesday; this could result in a big move in the stock. The option market is pricing in a 3.2% move in PG stock over earnings.
Remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions. Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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