A Potential 140% Return on the Market’s Safest Stock

It seems that every new day brings a new investor sentiment. Some days, investors are painfully bearish, sending stocks down at record paces. Other days, like today, these same investors believe the worst is over and a single positive jobs report is enough to rally the Dow 700 points.

The only thing that’s reliable any more is that there’s no lack of volatility to go around. For conservative investors, that means it’s time to play it safe. Buy stocks that are as recession-proof as possible and hope for the best.

One play that has been hot with traders since the beginning of this whole mess in October is Procter & Gamble (PG):

Here, you can see that as the S&P 500 has fallen 12% since early October, P&G is up by that same amount:

This trend is not going anywhere either. With the new Democrat majority in the House, a Republican Senate that won’t even vote on a shutdown ending bill and no new hope from the White House, this shutdown is going to continue.

And after that is finally resolved, whenever that might be, these politicians will then have to move on to the trade war with China.

Then, we might just see a fight between the President and his Federal Reserve Chairman over rate hikes.

The point is: the news underlying this recent bout of volatility will remain… possibly even get worse.

None of this is to say that the market will definitely fall in 2019. It might not. But what is certain is that stocks like P&G that offer products that will remain staples in everyone’s homes will continue to do well.

In fact, there’s a very good reason why P&G specifically will do well over the next month…

The Late January Catalyst

Procter & Gamble is a perfect safe haven for scared investors. As noted, its brands include the likes of Pampers, Crest and Tide. These are the kinds of products shoppers always buy… no matter what is happening in Washington or on Wall Street.

But beyond the brands in its lineup, P&G itself is a staple in investors portfolios. The company has a market cap of $230 billion and more importantly, a dividend of 3.1% even at today’s prices.

That’s well above the market average and exactly what risk averse investors are seeking these days. What’s more… P&G has been paying that dividend for 128 consecutive years and growing it each of the last 62 years.

That’s the kind of reliable income that drives constant share purchases. That growth is also a crucial piece in today’s messy interest rate environment.

You see, with the Fed hiking rates, income seekers are forced to seek shelter outside of bonds. Equity dividends, especially ones that are growing, offer the solution. They give investors the opportunity for both capital gain potential and income appreciation.

P&G’s next dividend announcement should be coming next week. Of course, that’s already pretty much built into its share price. So, that alone won’t move the needle much. But another upcoming announcement from the company should.

On January 23, Procter & Gamble is set to announce its second quarter earnings. While the company has seen its share price rise over the last six months, it has slowed down and has actually retreated from its $96 high it hit two weeks ago. The most likely reason its upward momentum has stopped is because investors are waiting to see what the company will say on Jan. 23.

There’s plenty of reasons to believe that it will be good news and spur on further buying. First of all, the company is one of the most consistent outperformers in the market. It has beat analyst earnings estimates each quarter over the last year. With margins expanding after a bit of a reshuffle, P&G could easily beat estimates again this month.

That event on Jan. 23 should be the catalyst to get its stock moving again. And there’s a perfect way to play it…

A Trade For Short Term Bulls

We suspect P&G will have a very good 2019. But with the current events and news headlines creating insane volatility in other stocks, this first quarter of the year should be great for the company’s share price.

The three main ways to play it are to buy shares of PG, buy call options on PG or use one of our favorite strategies… a bull call spread.

A bull call spread is a type of trade that includes both a long call option and a short call option.

A trader using this strategy would first buy a call option at or near the current trading price of the underlying stock and then sell a second call option with a strike price higher than the first.

This results in a net debit, but the income received from the sold call significantly decreases the amount of money at risk.

The trader would profit from an increase of the underlying stock’s share price just like the other two ways to play it. But both his total potential profit and amount at risk are both lower.

You can see how that plays out here:


Source: The Options Industry Council

Let’s look at a specific bull call spread trade for P&G.

A Specific Trade For P&G

A trader looking to use this strategy to take advantage of the expected short-term rise in P&G share price could buy a February 15 $92.50 call for $2.44 per share and sell a February 15 $95 call for $1.40 for a total cost of $1.04. Since each contract represents 100 shares of PG, that’s a net debit to the trader’s account of $104.

That’s the total amount he’d have at risk for the month and a half duration of this trade. That’s only about $10 more than the cost of one single share of PG and less than half the cost to buy a straight call option on it.

True, the potential profit is limited with this strategy. But as you’ll see, it still offers a tremendous risk-reward for traders.

To find this potential profit using this specific bull call spread, take the difference in strike prices ($95 – $92.50 = $2.50) and subtract the entry cost ($2.50 – $1.04 = $1.46). Since each contract equals 100 shares, that’s a total maximum profit per contract of $146.

That means that the total potential profit represents a 140.4% return on the amount at risk. Good luck getting that kind of return by buying PG shares. It takes years to double your money through straight stock investing. But with this trade, you could do it by the end of next month.

And with the earnings announcement later this month, you might even be able to close out this trade early for a significant profit.

— The Option Specialist

You May Also Like

About the Author: The Option Specialist