How to Play a 180-Year Price High

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We’re at a very real and very scary tipping point right now. This morning, the U.S. Labor Department released its latest job numbers. They came in at less than 50% of the expected amount of new jobs for the last month. The Department also revised the previous two months’ numbers down by around 20%. Yet, the market is up big on the news.

This is the kind of market we can expect over at least the next few months. Today’s jump on such terrible news comes down to one thing: investors see these low jobs numbers as proof and reason that the Fed will indeed cut rates.

While that’s to be determined, it does point out one major thing… investors are crazy right now. Bad news is good, good news is bad. We’ve been here before. It feels reminiscent of market action in 2008, before the giant financial dominos started falling.

That’s not to say that we’re headed for that kind of panic or collapse. But no one can deny volatility is in the air. Despite this somewhat universally-held idea, one company continues to defy logic.

Procter & Gamble (PG) made it through the terrible month of May relatively unscratched. The company saw its stock remain flat while the rest of the market was flirting with 6% declines.

Now, as the rest of the market makes up for what was lost in the “sell in May and go away” decline, P&G just continues to do better.

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Today, the 180-year-old multinational just hit its all-time high. It seems odd that a company so large and important to the global economy could be more valuable than at any other time in its history… right when the rest of the world feels less than enthused about its own economic picture.

Investors are clamoring for a rate cut to ease the economic panic and trade war worries. Yet P&G is trading like nothing in the world could be the matter.

Of course, this isn’t especially shocking. The company does well in good and bad times. Its product line makes it one of the most recession resistant stocks in the market. People still buy toothpaste, shampoo and laundry detergent even if they can’t afford that new iPhone or vacation.

So, if investors are worried about the current investment landscape, PG stock is a logical safe haven.

What’s more, P&G has paid a strong dividend each of the last 129 years, with the last 63 years showing an increase. With 10-year Treasuries threatening to fall below 2%, that income looks even better.

This is a tipping point. It’s impossible to know if Procter & Gamble will continue to do so well. We don’t know if investors will continue to pile into the company despite low single-digit growth. Likewise, we don’t know if the stock is bound to correct anytime soon.

Fortunately, option investors don’t have to be prophets to make money on situations like this one.

A Strategy For Increased Volatility

As we noted, volatility is no doubt increasing. For a stock like this – that just hit its all-time high and seeing a flood of new investors – that can mean only one thing: prices will move.

We can’t know which direction, but we do know that they are going to. There’s a strategy for that.

A long straddle is an options trade that involves buying both a call option and a put option with the same strike price and expiration date. While this play profits off major price movements, being on the buy side of each let’s the trader profit on size… not direction.

If shares continue to rally, the call option does well. If shares correct sharply, the put option does. You can see what that looks like here:


Source: The Options Industry Council

As you can see, the upside is nearly unlimited. The further away from the strike prices the underlying shares go, the more money there is to be made.

The amount at risk, however, is limited. A trader using this strategy can only lose the amount he puts in at the beginning of the trade – the cost of buying both options.

While there are no offsets in this strategy, the return on risk is attractive in a highly volatile environment… like the one we’re seeing today.

Let’s look at a specific example for P&G…

A Specific Trade For PG’s All-Time High

Right now, a trader could buy a July 19 $110 call for $1.86 per share and a July 19 $110 put for $2.78 per share for a total cost per share of $4.64. Since each contract represents 100 shares of PG, that’s an entry cost of $464.

Now, that sounds like a lot. But considering the amount this trade stands to make if either P&G continues its rally or comes back to earth, it’s worth it.

As we said, there’s no limit to how much a trader would profit from this trade. PG shares would only have to move by the cost of the trade before it becomes profitable. Anything more than that is pure cash in the trader’s pocket.

To find the profit point, we do a little math. If shares rally, they’d have to go higher than $114.64 per share ($110 + $4.64 = $114.64). If shares correct, they’d have to fall to $105.36 ($110 – $4.64 = $105.36).

In either case, that represents a price movement of 4.2% away from this strike price. To put that in perspective, shares of P&G are up 5.8% just this week… and 18.5% year to date.

Plus, the stock has six full weeks from today to make this move. Chances are high we’ll see at least this much movement with so much on the table.

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