Monday, August 2, 2010

Procter Puts

Qty Change Open $ High Change Close $ Current Price Symbol Name Market Value Low Cost Basis Cost per Share P/L $ P/L $ per Share Bracket Sec Type Exp Strike Under

20 ($0.03) $0.60 ($0.25) $0.49 PG 09/18/2010 57.50 P PUT PROCTER & GAMBLE $57.50 EXP 09/18/10 $980.00 $0.49 $1,662.90 $83.14 ($682.90) ($0.34) none Opt Sep 18 '10 (47 days) $57.50 PG

Sub-Total $980.00 $1,662.90 ($682.90)

Cash $55,982.50

Total $56,962.50

8/2/2010 at 18:32 EDT

Monday, August 2, 2010

The Striking Price
MONDAY, AUGUST 2, 2010 Don't Gamble on Procter & Gamble


Goldman Sachs is recommending a bearish options trade on the consumer-products giant.

GOLDMAN SACHS IS TELLING clients that shares of consumer-products giant Procter & Gamble (ticker: PG) could decline after reporting fourth-quarter earnings early Tuesday.

Already, the $61.75 stock is down slightly since the bank's influential derivatives strategists, John Marshall and Maria Grant, told clients to buy August $62.50 puts for $1.02 when the stock was at $62.70.

The bearish trade is driven by concerns that Procter & Gamble's management will release full-year guidance that falls short of what analysts expect. The company's consensus-earnings estimate is 73 cents a share, though estimates amongst the 20 analysts who follow the stock range from a low of 70 cents to a high of 78 cents.

Though the stock has already fallen, the move was likely prompted by broad investor reaction to last week's news that the U.S. economy grew less than expected, which exacerbated ongoing fears that consumer spending, which drives the economy, is declining.

These broad issues will come into sharp focus Tuesday for Procter & Gamble, which is why anyone who owns the stock and is interested in hedging the shares, or anyone who is interested in speculating on its further decline, should consider buying defensive puts.

The price of the August $62.50 puts has, however, increased to $1.94. The August $60 puts, which also could be considered, are trading at 82 cents.

If the stock price continues to decline, the August $62.50 put will increase in value. The same is true for the August $60 puts. Should the stock advance, put buyers risk losing the premium paid for the put.

Andrew Sawyer, who follows Procter & Gamble for Goldman, is concerned about the company's full-year earnings-per-share outlook because American and European growth rates are tracking slightly slower than expected, while the company seems inclined to reinvest revenue to drive growth rather than using productivity savings to boost margins.

Investors expect 9% year-over-year earnings-per-share growth, which he thinks is aggressive. He estimates a range of $3.80 to $3.95 versus a consensus estimate of $3.98.

Indeed, Procter & Gamble's year-to-date stock performance has been weak. Shares are barely changed for the year, and have declined about 1.6% in the past three months.

The implied volatility for one-month puts and calls is about 16.5%, down two points in the last month. Marshall and Grant estimate Procter & Gamble's options imply the stock price will make a 2.3% earnings day move, up or down, compared to a median 2.9% move, up or down, over the past eight quarters.

As investors are increasingly trying to gauge future-earnings potential, any company that issues disappoints earnings guidance is likely to see its stock decline. For this reason, buying puts on Procter & Gamble seems like a worthy hedge.


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