With summertime upon us, and the Fourth of July holiday about to kick off, many are filling their fridges with a classic American brand, Budweiser. In truth, as you likely know, it is not actually even made by an American company anymore.
Anheuser-Busch InBev (BUD) is headquartered in Belgium these days, but it remains one of the most internationally known companies in the world. And that’s exactly why it offers a unique opportunity right now.
You see, a few weeks ago, the company announced it was planning to list shares of its Asian operations on the Hong Kong Stock Exchange later this year. This week, it has just started taking orders for the listing.
For the company, this is its fastest-growing areas. So, investors are starting to perk up over this idea.
As you can see, this move comes during the stock’s rebound rally following last years disappointing decline:
There’s a reason for investors to be excited about this prospect…
While this subsidiary’s (known as Budweiser Brewing Co. APAC, or BBC APAC) eastern business in Australia, Japan and South Korea is growing at a solid 10% annually, its western Asia business in China is booming with a 23% growth rate according to analysts at Jefferies.
For a group InBev is valuing at $64 billion, that’s exciting growth. And it’s not just the opportunity to see the company’s Asian business trading as a standalone stock that makes this possibility intriguing to investors. The IPO market – and IPOs in Asia in particular – have had a very good year.
InBev is betting on this to continue despite the high tensions in Hong Kong right now and the uncertainty over the U.S.-China trade ceasefire announced this weekend.
Of course, nothing is set in stone… especially right now. With those geopolitical tensions, interest rate uncertainty and a top-heavy market, a deal like this could fall apart.
InBev desperately needs it not to, however. You see, right now, the company carries an enormous amount of debt, around $110 billion following its 2016 acquisition of rival SABMiller.
While this spinoff won’t completely wipe out its debt, it will put it on a path to reach its goal of having 4x debt-to-EBITDA by the end of 2020.
This debt also makes the company one of the most interested in what the Fed does at the end of the month. BUD would be a huge beneficiary of lower rates.
If this IPO goes through and is a success AND interest rates fall this summer, InBev shares could soar.
If the IPO gets delayed AND rates don’t decline, BUD shares could drop back down to early 2019 prices.
Clearly, a lot depends on the next few weeks for the beverage giant. For us as traders, that sets up a unique opportunity… no matter what happens.
You see, there’s a strategy we often use around here that plays price movement… not direction. We can’t know how all of this plays out. The Fed is a wildcard. The Asian IPO market is another unknown. The only thing we know for sure is that something will give in BUD prices over the next month and a half.
Fortunately, we have a perfect way to play that.
A Strategy For Short Term Volatility
A long straddle is a type of options trade that involves buying both a call option and a put option on the same underlying security with the same strike price and expiration date.
I know, it sounds counterintuitive. It basically amounts to being both long and short a stock at the same time. But that’s the beauty of it. It doesn’t matter which direction the stock trades. This type of strategy profits either way.
For BUD, we can’t know how its current situation will play out. We just know that investors will be actively trading it over the next several weeks.
You can see how this trade works here:
Source: The Options Industry Council
As you can see, the amount of risk is limited to the entry cost of the trade – the total cost of buying the two options. Profits, however, are unlimited.
The further away from the strike price the underlying shares move, the greater the profit.
Let’s look at a specific example to show you what that might look like.
A Specific Trade on BUD
Right now, a trader looking to use this strategy could buy an August 16 $90 call for $3.14 per share and an August 16 $90 put for $2.76 for a total cost of $5.90. Since each contract represents 100 shares BUD, that’s a net debit of $590.
That sounds like a lot, but that’s the total amount at risk. And the trader could only lose that full amount if shares stay at exactly $90 for the next seven weeks. Clearly, that’s not going to happen.
More importantly, shares don’t have to move much at all for this play to turn into a profit.
To find that, compare that cost to the strike price. For instance, if shares of BUD fall the trader would turn a profit as they drop below $84.10 ($90 – $5.90 = $84.10). Likewise, if shares rally, he profits on anything higher than $95.90 ($90 + $5.90 = $95.90).
In other words, if shares move in either direction by more than 6.6%, this trade profits. And as noted, there’s no limit to those profits.
Consider this… BUD was trading at $65 six months ago – well below the bottom profit point. Six months prior to that, it was going for $105, well above the top profit point. And none of that movement came when so much was going on for the company.
To put this in perspective… if shares return to their 2019 lows, that $590 cost would turn into $1,910. If shares rally to where they were just last summer, this trade would return $910. And with how much depends on the next few weeks, it could move a whole lot more.
In just the next seven weeks, we’ll know how the IPO is going to shape up and what the Fed decides on interest rates – both crucial for one of the most indebted companies on the planet.
This is a big month for BUD. And this trade is about the only way to profit without placing a giant bet.