Option Trade Of The Day: Philip Morris International (PM)
Once again last night, my bull and bear scans produced far more bearish signals than bullish signals.[hana-code-insert name=’adsense-article’ /]Once again there were a great number of stocks that are solid fundamentally and appeared simply because they are so overbought.
Something that I do with the scan results each night is enter the net total of bullish and bearish positions in to a calculation that sort of creates an overall barometer for the market, my own indicator if you would.
After the results of the last two days, my indicator reached a reading of -79.2 and that is the lowest reading for it since October ’15. The S&P peaked in early November that year before dropping over 14% through mid-January.
One stock that was on the bearish list that stood out because of its chart, fundamentals and sentiment was Philip Morris International (NYSE: PM). The chart caught my attention first with the downward-sloped trendline.
PM was down sharply yesterday as the FDA rejected the company’s smoke-free device. We see a similar decline back in October and the decline continued for several more weeks.
The fundamentals for PM were below average as well. With the worldwide push for smokers to quit, PM’s sales have declined by an average of 2% annually over the last three years and the EPS has declined by an average of 6% over the same time period.
Despite the poor fundamentals, the sentiment toward the stock was extremely high prior to yesterday. We saw extreme bullish sentiment prior to the decline in October and also before the decline in July.
Buy to open the Mar18 110 strike puts on PM at $4.70 or better. These options will expire on March 16. Given the poor fundamentals, the pattern in the chart and the high sentiment reading, I look for PM to drop over the coming weeks. The stock could see some support in the $100.60 area which marked the lows in November, but that would put these options right at a double. I also like the fact that it will only take a decline of 6.4% to generate a 100% gain on these options.
— Rick Pendergraft
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