Despite dour predictions for the first-quarter earnings season, Wall Street has pushed steadily higher during the past two weeks. In fact, the Dow Jones Industrial Average is trading near all-time highs, as companies fall in line with lowered earnings expectations.
Click to Enlarge With the Dow trading just north of 18,000, the blue-chip barometer is in for a real test next week, when several heavy hitters step into the earnings limelight.
Among those blue chips reporting, Procter & Gamble Co (PG), 3M Co (MMM) and Halliburton Company (HAL) could all offer up opportunities for savvy options traders.
Those traders looking for broad coverage for next week’s earning deluge might want to consider looking at the SPDR Dow Jones Industrial Average ETF (DIA). The DIA correlates with the Dow Jones, providing an easy way for options traders to take advantage of moves in the average.
With Wall Street looking a bit top-heavy at the moment, a May DIA $179/$180 bear put spread offers up nice potential in the event of a correction or pullback. At last check, this spread was offered at 38 cents, or $38 per pair of contracts. Breakeven lies at $179.62, while a maximum profit of 62 cents, or $62 per pair of contracts, is possible if DIA closes at or below $179 when May options expire.
Now, for next week’s blue-chip earnings …
Blue-Chip Earnings: Procter & Gamble Co (PG)
Click to Enlarge P&G will enter the earnings confessional ahead of the open on Tuesday next week. Wall Street is looking for fiscal third-quarter earnings of 82 cents per share on revenue of $15.81 billion — down 12.9% year over year.
Expectations are mixed for PG, with analysts handing out 14 hold or worse ratings versus 10 buy ratings. However, short-term expectations are elevated, with EarningsWhisper.com reporting a whisper number of 84 cents per share. PG has beaten the Street’s view in two of the past four reporting periods.
Weekly April 29 series implieds are pricing in a potential post earnings move of about 2.5% for PG stock, placing the upper bound at $83.52 and the lower bound at $79.48. A rally would leave PG shy of resistance at $84, while a decline would break support at $80.
Call Spread: With PG a bit oversold heading into earnings, and an earnings beat likely, a May $82.50/$83 bull call spread has plenty of potential. At last check, this spread was offered at 5 cents, or $5 per pair of contracts. Breakeven lies at $82.55, while a maximum profit of 45 cents, or $45 per pair of contracts is possible if PG closes at or above $83 when May options expire.
Blue-Chip Earnings: 3M Co (MMM)
Click to Enlarge 3M will also step onto the earnings stage ahead of the open on Tuesday next week. The consensus calls for a Q1 profit of $1.92 per share on revenue of $7.33 billion — down 3.3% year over year.
Pessimism is a bit heavy on MMM stock ahead of next week’s report, as only seven of the 19 analysts following the shares rate them a “buy” or better. The 12-month consensus price target of $167.56 represents a discount to Wednesday’s close.
That said, short-term expectations may be higher, with EarningsWhipser.com reporting a whisper number of $1.95 for 3M earnings.
April 29 series implies are pricing in a post-earnings move of about 3% for MMM stock, placing the upper bound at $175.31 and the lower bound at $164.69. At $170, technical resistance is heavy; and with MMM oversold, a breakout seems unlikely to hold ground for very long. Support, meanwhile, should materialize near $165.
Put Sell: While a bear put spread may offer up larger returns, MMM has plenty of institutional support and isn’t known for making large moves post earnings. As such, a more secure way of profiting from elevated implied volatility ahead of 3M’s report would be to open a put sell position.
At last check, the weekly April 29 series $160 put was bid at 48 cents, or $48 per contract. Traders will keep the initial premium received as long as MMM holds above $160 through April expiration next Friday. As a warning, should MMM stock breach $160 ahead of expiration, you could be on the hook for 100 shares of MMM stock for each contract sold at a cost of $160 per share.
Blue-Chip Earnings: Halliburton Company (HAL)
Click to Enlarge While Halliburton is not technically a Dow member, the oil services barron is a major player in the market, and a top-notch blue-chip stock. Halliburton will release its Q1 earnings figures ahead of the open on Monday, with Wall Street looking for a per-share profit of 4 cents on sales of $4.17 billion.
Plunging oil prices have obliterated Halliburton’s earnings and revenue, with earnings down from 49 cents per share last year and revenue shedding more than 40% year-over-year.
Still, whispers are calling for a strong earnings beat, with EarningsWhisper.com reporting a whisper number of 8 cents per share.
Analysts are quite bullish on HAL stock, according to data from Thomson First Call: Currently, HAL has attracted 29 buy ratings, compared to just six holds and one sell.
That said, HAL stock has been on a tear during the past several weeks and is now trading in overbought territory heading into Monday morning earnings. The shares have edged past resistance at $40, but long-term resistance near $41-$42 could prove to be a major hurdle. Weekly April 29 series implies are pricing in a move of about 3% for HAL following earnings, with the upper bound at $41.27 and the lower bound at $38.73.
Put Spread: With HAL overbought and resistance looming overhead, the stock is vulnerable to a “sell the news” event — especially if guidance comes in below expectations. As such, traders might want to consider a May $39/$40 bear put spread. At last check, this spread was offered at 34 cents, or $34 per pair of contracts. Breakeven lies at $39.66, while a maximum profit of 66 cents, or $66 per pair of contracts, is possible if HAL closes at or below $39 when May options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
