Stocking up on staples

10/15/19
  • PG up approximately 30% YTD
  • Nearly 25,000 Nov. $100 call options traded Monday
  • Earnings currently scheduled for Oct. 22

Consumer staples warhorse Proctor & Gamble (PG) started off the week conspicuously, hitting LiveAction scans yesterday morning for high call options volume and high call/put ratio.

It didn’t take long to find the culprit on the PG options chain: With PG shares trading yesterday morning around $120, 24,900 of the November $100 call options changed hands, a position representing nearly a quarter of a billion dollars of PG stock:  

Procter & Gamble (PG) options chain, 10/14/19. Nearly 25,000 Nov. $100 calls trade

Source: Power E*TRADE


It’s always difficult to determine the implication of any individual options trade, since it could be tied to a stock position, part of a multi-legged options spread, or both. In this case, though, there was no sign of a put options trade of similar size (something that may have implied someone taking a position on PG volatility rather than stock direction). Also, the fact that open interest (the number of unclosed options positions) in the November $100 calls was more than 25,000—more than any other individual option—indicates that at least some traders may be using PG calls because of a bullish outlook on the stock.

PG has certainly rewarded bulls over the past 18 months or so, having gained around 30% year-to-date, and rallying 69% since May 2, 2018, which was the low point of its last major retracement. The stock hit its most recent record high ($125.36) on September 30. It’s current pullback of roughly -4% from that peak happens to be its biggest dip since it gave back more than 6% immediately following a 4% jump after its most recent earnings release on July 30:

Procter & Gamble (PG), 5/29/19–10/9/19. Pullback from record

Source: Power E*TRADE


Yesterday’s decline also dropped shares close to a chart support zone defined by the September swing lows, so PG traders may be closely watching the action around this level to see if the move is just the latest in the series of pullbacks that have been followed by higher highs, or something more significant.

Either way, there’s a good chance more action—i.e., price volatility—is in store, since PG is scheduled to release its Q3 earnings on October 22 (a week from today). PG has a history of beating its headline earnings numbers:1 In the past 35 quarters (since January 2011), the company has topped earnings estimates 26 times and topped revenue estimates 22 times. In the past 12 quarters, it’s been even more consistent, beating earnings 11 times, revenues nine times, and both eight times.2

But beating your numbers doesn’t always translate into an immediate (or sustained) rally. Immediate reactions to news events often get reversed, at least partially, as illustrated by PG’s performance immediately after that July earnings release (which topped both earnings and revenue estimates): The stock made a big leap, then spent several days walking it back, then resumed the uptrend that had preceded the event.

In fact, despite its overall bullishness, PG was lower five days after earnings in eight of the past 12 quarters,3 something many bullish PG traders may have been able to use to their advantage in recent months.

Market Mover Update: Twilio (TWLO) rallied around 2% intraday yesterday, pushing its two-day gain above 5% (see “Trend retracement hits key level”).

Today’s numbers (all times ET): Empire State Manufacturing Survey (8:30 a.m.).

Today’s earnings include: United Airlines (UAL), BlackRock (BLK), Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), UnitedHealth (UNH), Goldman Sachs (GS), Johnson & Johnson (JNJ), Prologis (PLD).

 

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1 Zack’s Equity Research. Why P&G (PG) Could Beat Earnings Estimates Again. 10/14/19.

2 StreetInsider.com. Proctor & Gamble Earnings. 10/14/19.

3 Supporting document available upon request.

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