Stock Options To The Rescue! Procter & Gamble (PG)

| June 21, 2012 | 0 Comments

PG OptionsToday we’re going to look at a stock replacement strategy on Procter & Gamble.  It allows you to reduce your risk and gives you upside potential.

Here’s what happened…

Procter & Gamble (PG) shares are down more than 6% after coming out and reporting a downward revision earlier this week.  The stock has fallen from $63.60 to under $60 per share in the last few days.

And since the beginning of 2012, PG has fallen from $66 to under $60 a share.  It seems that Procter & Gamble’s CEO, Robert McDonald, hasn’t exactly been doing his job very well since he took over three years ago.

Here’s the deal…

The consumer staple giant came out before the bell the other day and pre-announced their next quarterly report. 

A company must pre-announce when they are expected to miss analysts’ expectations by a certain percentage.  And that’s exactly what happened here.

And of course, this did not sit well with investors.

Here’s the kicker…

Once again, Procter & Gamble is failing to live up to expectations… its own as well as the market’s.

And now the official warning is out!

On Wednesday, PG admitted that it would not meet its forecast for sales and earnings in its fourth fiscal quarter.

Investors were expecting revenue growth of 4%-5% during the current quarter.  But PG warned revenue growth would likely slow to 2% to 3%.

And EPS looks like it’s going to take a hit as well.  Analysts were expecting them to earn $0.79-$0.85 per share this coming quarter.  But PG expects EPS to come in between $0.75 and $0.79 per share.

The reason for the shortfall is its inability to meet growth in China as well as continued deterioration in Europe.  In addition, PG has concentrated this year so much on growing overseas, it has given up market share in the United States.

Of course, this has backfired in a big way on the company’s domestic growth.

Obviously, slashing future revenue and earnings estimates is going to drag down any stock.  And PG is no exception.

Anyone who bought Proctor & Gamble going into 2012 is now sitting on some sizeable losses.  Instead of holding onto the stock for a rebound, consider using options to replace your stock.

Here’s what to do now…

Let’s assume you bought 100 shares of PG at $66 at the beginning of the year.  You’re sitting on a 10% loss. 

The only good news is you have collected a few dividends since January, but not enough to make up for this loss.

So, selling your PG stock and buying the PG January 2013 $62.50 call option for $1.30 will reduce your risk and give you upside potential if PG rebounds later this year.

Let’s take a closer look…

At the recent price of $60.40, you can sell your 100 shares of PG for $5,600 and take a $560 loss.  You’ll also pay $130 for the call option.

This strategy limits your losses to $690 ($560 on the stock and $130 for the call option) or 10%.  But given the dire forecast PG just issued, the losses from continuing to hold the stock could easily exceed this amount.

Remember, your losses are limited to the cost of the call option, in this case $130. But your loss from continuing to hold PG will be even bigger if it falls below $60.40.  In fact, PG could easily fall below $55 per share if China and Europe continue to fall apart.

But replacing the stock with a call option does more than just limit your downside.

The call option gives the ability to recoup your losses and even profit if PG’s stock rebounds later this year.

In order for the rescue to be successful, we need to recoup $690.  That means you’ll breakeven on the trade if PG rebounds back to $67.30 by the time January options expiration comes around.

And there’s a good chance PG will rebound if the market rebounds in the second half of the year.

In essence, replacing the stock with a call option limits your risk to the China and European crisis.  And if they get things figured out in the next few months, you’ll be able to recoup your losses and even profit as Proctor and Gamble makes a sharp rebound.

Safe Trading,

Marcus Haber

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Category: Stock Options To The Rescue!

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.