Equity markets have had a great year, up 13% on the S&P 500, but Constellation Brands, Inc. (NYSE:STZ) is up 37%. But even after an extended run, from the price action perspective it’s not stretched.
However, shooting stars like STZ stock present a dilemma to most traders. When stocks rise this long at this rate, they perpetually seem like they’re ready to correct, which leaves many traders waiting for the correction that never comes. I use options to circumvent this.
Fundamentally, Constellation stock with a 26 price-to-earnings ratio is not cheap, but at five times book, it’s not bloated either — especially since its financial metrics are solid.
I like the product offering of STZ. People who consume them are not likely to change their habits anytime soon. This makes for long-term visibility on the business model and the financial results. And as long as management continues to deliver as it has been, the stock should hold the upward trajectory in this bullish stock market.
Technically, STZ stock is trading inside a simple regression channel. It’s an orderly move in an ascending trend. So is it too late to enter into a bullish STZ trade at all-time highs?
Not if I use options to do it. Today I will structure a trade that joins the green party in Constellation stock while leaving room for error just in case there are a few bumps in the road.
STZ is now trading just below Wall Street’s average price target, so by definition there’s just as much upside potential as downside risk. This is a good place to deploy some risk with room to spare.
Click to Enlarge But instead of buying STZ shares outright and hoping for a continued rally to profit, I’d rather bet on proven support. I do this using options where I am able to build a buffer between current price and the level of my risk. It is important to note that I am willing to own STZ shares but at a lower price.
Most experts believe that Constellation is a buy, which leaves room for potential downgrades. But the stock has been trading in a steady ascending channel and I see no reason for it to change in the next few months. This is provided that the equity markets overall maintain the current macroeconomic outlook.
STZ Stock Trade Idea
The Trade: Sell STZ Apr 2018 $165 put for $2.50 per contract. This is a bullish trade where I have a 90% theoretical odds of earnings maximum gains. Otherwise, I will amass losses below $162.50.
Not all investors want to sell naked puts, especially on a stock that is falling into an abyss. For those, they can sell a spread instead.
The Alternate Trade: Sell STZ Apr $165/$160 credit put spread which risks less money yet can still deliver 15% in yield. In either case I don’t need a rally to profit. In fact, STZ can fall another 20% from here and I can still earn my maximum gains.
Investing in stocks is risky, and regardless of how careful I am, I never bet more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
