Disclaimer: This is in no way intended to be advice in any form or fashion. I’m just shootin’ the shit a little about a trade I placed today. Please seek out competent investment advice from someone else. Also, investing involves significant risk. Options involve even more risk.
I’m expecting a lot of consumer staples companies to take a slight hit after they report earnings. This has happened with KO, KMB, and PG to name a few.
Tomorrow morning Colgate (Ticker: CL) reports earnings. Much like other consumer staples, I’m expecting rough trading to take place after earnings. It’s not that CL is a bad company or anything (I like the company quite a bit actually), but large multinationals are coming under pressure on their earnings due to exchange rates. When a company makes a sizable portion of their profits overseas and the dollar strengthens against foreign currencies, the bottom line is negatively affected (more on international finance another day).
I’m normally a buy and hold kind of guy, but also like to place a few short term trades to try and make a profit. Today, I placed a bearish bet against CL. No, I didn’t short the stock, not a fan of going short. When I think a company is going down, I like to use options. Options are a type of derivative that give you the right to buy or sell a particular security at a specified price by a specified timeframe. Rather than tying up a large amount of capital for a short term trade, options are a way to participate in upward and downward movements with less capital tied up. The value of an option is derived from an underlying asset. It is a leveraged instrument, hence the price movement of the option can be very volatile (i.e. you can make a lot or lose a lot in a short period of time, depending on your trade).
In today’s case, I purchased out of the money 69 PUT options on CL. I placed a limit order that filled at $0.67 per contract. When the order filled, CL was trading around 69.41 (closed at 69.31). Basically, I’m thinking if the earnings report tomorrow is disappointing (or even the forecast) the stock moves by a few percentage points (hopefully to the downside for this trade). The contracts expire this Friday, April 29th for all intents and purposes. So this really was a short term trade that I will either close and exit tomorrow, if the stock price goes down a little. Or, if I’m completely wrong and the stock moves up, the options will basically be worthless and I’ll let them expire.
In a perfect world, the stock drops tomorrow, I close my options position at a nice profit. Also, depending on the degree of a potential drop, I go long the stock and pick up a round lot.
Main concerns for tomorrows earnings report: exchange rates being a drag on earnings, forecast, and justifying the high multiple that CL is currently trading at.
Aside from speculation, options contracts can also be used as a great instruments to truly hedge your portfolio. I just hate for someone coming across this on the world wide web to have the misconception of options being only for speculation. Options can be used for hedging, speculation, leverage, income to name a few strategies. I could have placed a safer trade by shorting a put at a lower strike price, but I didn’t want to cap my potential return. I’m greedy. More on the fascinating world of derivatives and options another day.
Taxes: I placed this trade in my brokerage account. So depending on how things play out, I either will have short or long term capital gains/losses on this particular trade.
I’ll report back tomorrow on whether I made a profit or basically threw away money.
Update 5/2/2016: I was way off on CL. Should have bought the calls or even set up a straddle for the trade instead.Follow me on the social medias: