Is the economy improving or not? Frustratingly, there are a few signs that it is, and a few signs that it is not.
Here is a trade idea on a company who hopes that it is improving … even though this strategy can benefit from it not improving.
Tiffany & Co. (TIF — $78.47): Call Credit Spread
The trade: Sell the Oct 82.5/85 Call Credit Spread (selling the Oct 82.5 call and buying the Oct 85 call) for 45 cents or better.
The strategy: The maximum potential profit for this trade is 45 cents if TIF is trading below $82.50 at October expiration. Both call options would expire worthless. The maximum loss is $2.05 ($2.50 – $0.45) if TIF is trading above $85 at October expiration. Breakeven is $82.95 at expiration based on a credit of 45 cents.
The rationale: Many analysts look at companies like Tiffany and use their earnings reports as a gauge for how the economy is doing. If they beat expectations, the economy is growing and vice versa. Tiffany announced at the end of August and generally did pretty well outside of the U.S. Same-store sales rose quite a bit overseas, but only about 1% in the U.S. Good for Europe, and not so good for the U.S.
It remains to be seen whether those spending habits will change anytime soon, but for now the stock is trading at about 20 times its earnings. It might be a little overpriced.
Click to Enlarge Breaking down the chart, you can see that Tiffany stock has dropped considerably after its earnings announcement. It is currently trading right around its 50-day simple moving average. The moving average has acted as support and resistance in the past, and this time it needs to act as resistance and keep Tiffany from rising.
Another point that is going in this trade idea’s favor is that TIF stock has not closed above $82.50 in quite some time. Let’s keep it that way. Plus the implied volatility is currently higher than historical levels, making options somewhat overpriced.
Cubic zirconium is the way to go!
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.