A low-risk options trade that wins if a volatile casino stock surprises the Street next week
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Looking at the earnings calendar for next week, a tale of two types of consumer stocks emerges: the predictable and the volatile. We’ll look at an options trade that could win if one of the volatile stocks surprises Wall Street. Holidays, birthdays, anniversaries and, less than a month a way, Valentine’s Day… when your gift and date for your significant other are revealed, what would you rather hear? “So predictable.” or “You’re full of surprises!” We all want to be exciting and remarkable on those special occasions, and maybe some people are able to astonish and delight their partner each and every day, but the truth is the foundations of great long-term partnerships are often stability, loyalty, and consistency. Predictable might not make for the most exciting anniversary, but it might mean you have more of them. This occurred to me as I looked at the earnings calendar and saw that consumer discretionary stock Las Vegas Sands (LVS) reports earnings next week, with options prices implying a move of 5% higher or lower. But also reporting are two of the most well known consumer staples stocks, Procter & Gamble (PG) and Colgate-Palmolive (CL) . Neither of the latter two are implying a move of even 3%. There were few areas hit harder by the Covid lockdowns than consumer discretionary stocks in the travel, lodging and dining industries. Peak to trough, LVS fell 60%, and while the stock has recovered off those lows it remains nearly 35% below it’s pre-Covid January 2020 peak. Even sharper than the share price declines were company revenues. Fiscal-year 2019 revenues were $13.7 billion with more than 85% of those revenues coming from Marina Bay Sands in Singapore and the company’s five big hotel casinos in Macao. Fiscal year 2020 revenues were $2.94 billion, a nearly 80% year-over-year decline. The most astonishing statistic might be the second quarter of 2019 vs. 2020, where there was a 98% decline. This was not the fault of corporate management or a competitive flaw in their hotels. They, along with many other businesses, were ordered to close. The trade: LVS call spread The company’s revenues have recovered meaningfully, but not completely. If ultimately they do recover to prior levels, and if we assume that governments are unlikely to repeat another shutdown, LVS could move meaningfully higher. The purchase of an April $50/$55 call spread could profit from a move higher if we get a nice earnings surprise, but if the stock does little or falls, the trade risks just $1.50 per share (or $150 in total, as each call option represents 100 shares). The trade: Bought April $50 call Sold April $55 call A steadier trade Making a living at the craps table is a stressful life though, and a steady income from another source can provide needed stability. For that, consider the following charts from Procter & Gamble and Colgate Palmolive. Notice that their revenue declines during the Covid shutdowns were almost imperceptible. Gambling and carousing all night aren’t advisable during a pandemic, but that doesn’t mean you don’t have to brush your teeth. These price charts aren’t particularly exciting, they’re just “so predictable”, but what is also predictable are their dividends. Both companies dividend yields are 2.5%, and more importantly, those dividends grow very steadily. So feel free to splurge on the trip to Vegas for your anniversary, a quick wedding or a bullish options bet into earnings, but when you get back home 1) brush your teeth and 2) sleep well knowing you also have some steady dividend income. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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