This year has been a long and lonely road for the bears. Theirs has been a life of living in the shadows, roaming the streets of finance in search of a stock — any stock — worthy of shorting.
Sadly, their hunt has yielded few results.
And yet, there is one industry that the bears were really able to sink their teeth into this week: agribusiness.
In response to a dramatic change in expectation of future prices of potash, potash producers like Potash Corp. (POT), Mosaic (MOS) and Agrium (AGU) were taken out behind the woodshed and beaten mercilessly. The bear raid spilled into other members of the ag space, too, including Monsanto (MON) and Syngenta (SYT).
The trouble with joining the bearish assault on the hardest-hit names at this stage is that much of the damage has already been dealt. Take POT, for example: It’s down a harrowing 20% this week alone. Sure, it could go lower, but the risk-reward at this juncture leaves much to be desired.
While the meat might well have been fully stripped from the carcass of agribusiness stocks most directly exposed to potash prices (like POT & MOS), Monsanto still looks beefy. Let’s explore its price chart in greater detail.
Although it remains in an overall uptrend on the weekly time frame, MON has struggled to gain much ground this year. In fact, the sloppy, choppy action is taking on the form of an ominous-looking rounded top.
Drilling down into the daily chart reveals that the recent weakness has been sufficient to turn the direction of the 50-day moving average from up to down. The recent selloff has brought MON once again to the lower support level of the topping formation.
When a stock is sitting on a multimonth support level, there are two opportunities that present themselves.
- If you’re willing to bet that support holds for now and potentially incites a rebound in MON, you could sell a short-term bull put spread.
- If you think agribusiness continue to eat dirt, then you should wait for a breakdown of the support zone in MON and go bearish.
Since Monsanto stock has already fallen 7% during this downswing, it would be ideal to see the stock consolidate before breaking down. That would allow MON to catch its breath and have plenty of gas in the tank for the next swing.
Sell the Aug 97.50-95 bull put spread for around 80 cents. You’re essentially betting MON will remain above $97.50 for the next two weeks. The max profit is limited to the initial 80 cents. The max loss is limited to the distance between strike minus the net credit, or $1.70. To minimize the risk, you could exit if MON falls beneath the lower bound of its support zone at $96.50.
Buy the September 95-100 bear put spread at whatever the market price is when MON finally breaks support. Currently the spread is trading for $2.30, but it will very likely cost more once the stock finally triggers. The max loss is limited to the debit paid for the position. The max profit is limited to the distance between strikes minus the net debit. If we were to enter at $2.30, then the max reward would be $2.70.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.