Bull or Bear Bet on Tyson Foods

Google+ Pinterest LinkedIn Tumblr

Roughly 5% of the world’s protein was completely wiped out overnight. African swine fever struck the world’s largest market for pigs earlier this year. China is the world’s largest pig producer and pork consumer. Yet, this disease will likely halve that production.

Already, some other companies are taking advantage. One of the world’s largest publicly-traded pork producer, Tyson Foods (TSN) has already seen its share price spike 50% so far in 2019.

It’s not just the scarcity in pork due to China’s swine fever problem either. Tyson’s other products, like chicken and beef, are replacing some of the protein demand unsupplied due to the Chinese pork situation.

During the second quarter, Tyson did see sales rise to $10.4 billion from $9.8 billion. But earnings actually shrank on smaller margins. The real test will be its third quarter that just ended. It announces early next week.

Of course, the pork shortage isn’t the only issue affecting Tyson these days. 2019’s darling IPO Beyond Meat has completely changed the game. Its plant-based offerings have awed investors, sending its own shares up six-fold.

Not to be outdone, Tyson recently announce it was going to be pouring serious money into its own plant-based products to compete. Investors have been supportive and consider the idea worth doing. That’s been another driver for Tyson this year.

The question those investors now have to ask themselves is if this can continue.

Screen Shot 2019-08-01 at 7.06.58 PM.png

As you can see, the company’s rally was straight up for the first five months of the year. But by the end of May, shares starting testing that $82 or so price point.

Clearly, they are consolidating for a major move in one direction or the other. And with next week’s earnings announcement, I think we’ll find out sooner rather than later which one it is.

Fortunately, there’s a way to play this clear breakout pattern. Instead of guessing which direction shares will break, you can instead trade a spike in volatility…

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 a stock you believe is set to make a major move.

As counterintuitive as that sounds, the strategy is solid. The idea behind buying both a long and short position is that only one of them has to profit to make the whole trade profitable. In the case of Tyson, it’s clear the stock is ready to make a move. But it’s impossible to tell which direction.

This trade lets traders play both a large move to the upside and a large move to the downside. The only way it would turn to a loss is if shares somehow didn’t move at all following next week’s earnings report.

You can see how a long straddle works here:


Source: The Options Industry Council

Clearly, this is only a play on volatility. A long straddle trader doesn’t care if shares go up or down… just as long as they move in a big fashion.

As you can imagine, buying two options is a more expensive type of trade than others. But it is one of the only kinds that offer a known and limited risk and an unknown but unlimited potential reward.

You see, traders using this strategy can only lose what they spent to enter the trade. But the further away from the strike price the stock moves, the greater the profit would be.

Let’s look at a specific example of a long straddle on today’s unique Tyson situation…

A Specific Trade on TSN

Right now, a trader can buy an August 16 $80 call option for $2.65 per share and an August 16 $80 put for $1.89. That’s a net debit of $4.54 per share. Since each option is worth 100 shares of TSN, that’s a total cost of $454.

While that entry cost might seem high, it is easily recouped.

To find the breakeven point, compare the cost to the strike price. If shares sink, following next week’s earnings, this trade enters profitability below $75.46 ($80 – $4.54 = $75.46). If shares breakout of their consolidation to the upside, the trade becomes profitable above $84.54 ($80 + $4.54 = $84.54).

In either case, that represents a price movement of just 5.7%. Remember, shares rallied more than 50% in the first five months of the year. Since then, investors have been waiting on this very important earnings announcement.

If the Chinese swine problem turns out to greatly impact Tyson’s bottom line, shares could take back off. Or, just as likely, if the company didn’t profit as much from the shortage as hoped, that early 2019 rally could fall apart, sending share back to where they were at the start of the year.

And of course, this is a crucial quarter for the company’s new plant-based product group. Any news on that front could greatly impact how investors see share prices.

This is a clear play on an inevitable break. With so much riding on next week’s announcement, you can expect far more than just the 5.7% move it would take to lock in profits. A double-digit move in one direction or the other is definitely on the table.

Write A Comment