P&G’s Historic Rally Presents a Contrarian Income Opportunity

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Sometimes, a great company worth owning in the long term is not one that performs well in the short term. That’s the case with Procter & Gamble (PG) today.

P&G is one of the worlds oldest and most successful companies. It has tremendous sustainability and product awareness. And for anyone looking at picking up a 30-year retirement stock, it might just be the best out there.

However, a rally unlike anything resembling evidence-based has some investors calling a near-term top to P&G’s share price.


As you can see, Procter & Gamble’s stock has been on a tear since late last year. When nearly everything else in the market was undergoing a correction in the fourth quarter, PG kept plowing higher. Just this year, investors have been able to lock in nearly 14% in returns in just three and a half months.

Now, we’re not saying P&G is due for a heavy retraction from here. But this rally was a bit too hot for a company that only produces 2% or 3% growth annually. In fact, the company’s top line has been flat over the last several quarters.

Of course, P&G isn’t the type of company that gets investors excited. It just hums along churning out respectable financial results and a steadily growing dividend. But that’s what makes the recent stock performance so extraordinary.

It’s clear the company has seen a more rapid price appreciation than its underlying business deserves… at least right now. To be fair, its board did just declare yet another dividend hike of 4% — marking its 63rd annual increase. It really is hard to beat for anyone looking for steady income in their portfolio.

Still, it wasn’t that long ago you could count on a 3% or even a 3.5% yield when buying P&G shares. Now, its yield sits at just 2.8%. Anyone that has covered Procter & Gamble over the years could tell you that the stock is due for a slowdown.

Now, you’d be silly to go out and short PG to take advantage. Even if the company does fall further than expected, it would still find support at the $100 level. Right now, shares go for $104.50. So, there’s not much to gain by going down that road.

Instead, there is a way to take advantage of this situation without necessarily betting against the consumer staple giant.

A Strategy to Collect Income From P&G’s Price Lull

A bear call spread is a different kind of trade than many are used to. Instead of putting up money to make more money, this play lets traders collect their return right up front. This is called a credit spread. Here’s how it works.

A trader looking to get into a bear call spread would sell a call option on a stock he believes has no further to rise in the near term (like P&G right now). He collects that option premium right up front. He then buys a protective call with a higher strike price. Since that second call option is cheaper than the first, he only pays a small amount for that protection.

This allows the trader to 1.) collect income up front, 2.) keep it all as long as shares don’t rise during the duration of the trade and 3.) buy protection in case shares somehow do continue to rally ever higher.

This gives the trader a solid way to earn a bit of income from a sideways to downward moving stock without risking too much in exchange.

Here’s how this kind of trade looks:

OIC Profile

Source: The Options Industry Council

As you can see, the initial income to open this trade is the total potential return the trader could receive. But the total risk is also known up front.

To find that, take the difference in strike prices and subtract that initial income. That risk, however, would only become a loss if shares somehow continue rising past the strike price of the second call option.

Let’s look at a specific example to see what all of this means for Procter & Gamble.

A Specific Trade For P&G

A trader looking to collect a little income on this sideways-to-downward lull in PG’s share price could sell a May 17 $105 call for $1.80 per share and buy a May 17 $110 call for $0.33 per share for a net credit of $1.47 per share. Since each is worth 100 shares of PG, that’s $147 in income collected right at the start of this trade.

Now, for the trader to keep all of that initial income, shares of P&G don’t have to do anything. Normally, to make money in both stocks and options, you need to see some kind of price movement. For this type of trade, no movement works just as well as downward movement.

Again, we’re not claiming that P&G is due for a serious price decline. Its share price has just gone up too much too fast. Either it halts at these prices until the business can catch up or a slight correction is on the table. It doesn’t matter which one happens; this trade would profit.

Now, there is some risk. But as noted above, it is limited and known right up front.

If shares of PG rally above $110, the trade would turn to a loss. To find out how much of one, take the difference in strike prices ($110 – $105 = $5) and subtract the income received ($5 – $1.47 = $3.53). On 100 shares, that’s a total risk of $353. But remember, shares would have to continue defying gravity for that loss to be realized.

For a company that sees low single digit financial growth to experience share price growth of 32% over the last six months, a one-month cooldown is more than likely. And this particular trade wins even if shares just don’t go up any higher.

1 Comment

  1. PG isn’t showing options in that price range for 145 strike price

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