Since the February stock market correction started, Philip Morris International Inc. (NYSE:PM) stock has had a turbulent period of trading. The stock whipsawed more than 10% on several occasions. The end result was a devastating slip as it is now 20% below January’s levels.
Compare that with a flat stock market — both Philip Morris and Altria Group, Inc. (NYSE:MO) stocks have been decimated. Meanwhile, cannabis stocks like GW Pharmaceuticals plc (NASDAQ:GWPH) have fared much better and are in line with the stock market in general.
The reason for the most recent fall in PM stock was a miss on revenues. When they reported earnings, they beat the bottom line but missed on the top line. And therein lies my thesis.
This is not the first time they missed on revenues, but the fact that they were able to manage their P&L to beat on the bottom line tells me that management knows what it’s doing. Today I am betting on that to continue going forward. This is to say that there is a bottom to this correction in PM stock.
Of late, the stock has been violent, but overall it’s been a downward spiral since last May and now down 30% from those highs. It is possible that it bounces into a rally but while overall stock markets are nervous and near all-time highs, I’d rather leave room for error when trading a disadvantage stock like PM .
Therefore I will use options to bet that the long-term support will eventually hold. This will allow me to generate income with no out-of-pocket risk and leave plenty of room for error. Although I don’t need a rally to profit, if one does come my profits will materialize faster.
Click to Enlarge Fundamentally the stock is not bloated. The company has a proven track record of navigating material headlines. The demise of the industry has been erroneously called too many times. This too shall pass.
Technically, Phillip Morris stock has strong support below $80 per share that dates back five years. I will place my risk even below that for more safety and a better potential stock entry point. If the price goes against my trade I will own PM shares at an even heavier discount than current price, which won’t be a problem to me.
PM Trade Ideas
The Trade: Sell the PM Jan 2019 $65 naked put and collect $1.40 to open. Here I have a 85% theoretical chance that I retain maximum gains. But if the price falls below my strike then I own the shares and would suffer losses below $63.60.
Selling naked puts is daunting, especially in a stock as disadvantaged as this. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell PM Jan 2019 $70/$65 bull put spread where I have similar odds of winning. Then the spread would yield 17% on risk.
Since there are no guarantees when investing in stocks, I never risk 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.