Let Philip Morris Burn Itself Out

by John Kmiecik | August 5, 2013 8:22 am

Several things in life can be dangerous to your health, and some would say trading is one of them. But there truly are activities that should be avoided if you’re hoping for a healthier life.

Here is a trade idea on a not-so-healthy habit that still might be good for your portfolio:

Philip Morris International (PM — $89.59): Call Credit Spread

The trade: Sell the August 90/92.5 Call Credit Spread (selling the August 90 call and buying the August 92.5 call) for 55 cents or better.

The strategy: The maximum potential profit for this trade is 55 cents if PM is trading below $90 at August expiration. Both call options would expire worthless. The maximum loss is $1.95 ($2.50 – $0.55) if PM is trading above $92.50 at August expiration. Breakeven is $90.55 at expiration based on a credit of 55 cents.

The rationale: It is no surprise that most people are trying to live a healthier life, which includes trying not to smoke (or if you do smoke, trying to quit). Unfortunately, that is not good news if you are a company whose main income is sourced from tobacco consumption. Philip Morris is constantly faced with government regulations around the world and rising excise taxes, the latter of which really put a dent in PM’s lackluster second-quarter profits. The question becomes, will the increase in other tobacco products like cigars be able to offset the decline in cigarettes?

The answer to that question probably will be answered somewhere down the road, but considering this trade idea has only two weeks left until expiration, it is not very critical to the success of this trade.

PMchart 300x135 Let Philip Morris Burn Itself Out
Click to Enlarge
Looking at the chart, PM stock has declined heavily since the middle of May. After the company announced earnings in mid-July, the stock has pretty much bounced around below $90.

What is significant about the $90 area is that the stock has not been able to close above that area since earnings and both the 50- and 200-day simple moving averages are in the area too. These moving averages can act as forms of resistance and potentially keep the stock from moving higher.

Philip Morris — like cigarette use — needs to keep declining!

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here[1].

Endnotes:
  1. free trial of John’s live options trading room here: http://markettaker.com/options_insider_trial/

Source URL: http://investorplace.com/2013/08/credit-spread-philip-morris-international-pm/
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