HP Inc (NYSE:HPQ) reported earnings yesterday and HPE and HPQ stock are falling by 8% today. The results were decent as they delivered a beat on the top line. Expenses were a challenge but they still met expectations. But then came the bad news …
Meg Whitman will leave as CEO of HPQ in a few months.
Wall Street hates surprises and I am sure that the Meg news is a contributing factor to the dip. Typically high profile CEOs get associated so tightly with their companies that investors fear the exodus headline. But the fears will abate and therein lies the opportunity.
The current equity markets are at all-time highs. The bullish thesis is alive and well. It will take a major game-changing headline to shock this market into a deep correction. For now, traders are buying every dip. They will eventually buy this particular one too.
Coming into the earnings, HPQ stock was up 50% year-to-date. So, this small tizzy wont break the trend. In mid-October, it broke out of $21 per share then defended twice since. This will be the third test and there is a good chance that the bulls will catch that knife.
I want to anticipate this but I won’t risk my money buying the HPQ shares outright and hope for the bounce. I will instead sell premiums into the sellers’ fears. If I am successful, then I would have created profits without any out-of-pocket risk. Otherwise, I would end up owning shares at an additional discount.
Click to Enlarge Fundamentally, HPQ stock is not expensive at 16 price-earnings ratio. So even with the worst case scenario for my trade I am confident that I can manage out of it for a profit. Price-sales is 0.7, so HPQ stock is not obviously bloated from any angle.
Technically, HPQ can fall closer to $20 and still be within a comfortable ascending trading range. $19.50 is another pivot level, and it, too, should act as support if the selling lingers into the holidays.
These tend to create sticky zones, as neither bulls nor bears want to let them go without a fight.
The Bet: Sell HPQ Jan 2018 $20 naked put for 40 cents. This is a bullish trade, but one that doesn’t need a rally to profit. I have a 75% theoretical odds of winning. But if the price falls below $19.60 per share, I accumulate losses.
To mitigate the risk of selling naked premiums, I can sell a credit put spread instead.
The Safer Bet: Sell HPQ $20/$19 bull put spread, which has about the same odds of success. It would deliver 12% in yield on risk.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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.
