by Chris Johnson 10/06/08
Last year at this time, the "ag" trade was all the rage, but it's been a different story for much of 2008. Monsanto (MON) has dropped about 5% for the year, after being up as much as 30% in June, and all signs pointed to the trade having some more unwinding to do in the shorter term.
Normally, I like to play our earnings trades a few days before the company reports. But Monsanto caught my eye as a potentially explosive trading opportunity, as the stock was destined for a decline into earnings based on several factors.
With the company's earnings announcement due Oct. 8, the consensus expectation among Wall Street analysts called for a loss of 13 cents per share -- a 5-cent improvement from last year.
Analysts are in love with MON, as seven of nine rated the shares a "Buy" and no one considered the stock a "Sell."
Keep in mind that expectations per se don't necessarily matter -- it's whether they are, or even can be, at the very least met. This leaves plenty of room for downgrades.
MON's recent slump from its June high does not justify the optimism I was seeing among analysts and the options markets. With more potential pressure being put on commodities and the ag trade in the short term, I was looking for MON to decline to at least the $90 mark.
The put/call ratio has fallen for the past month and showed signs of reversing. That is, MON had become crowded with calls, so I decided it was time to jump on this name before the puts started to increase in strength.
We got to the party just in time. On Sept. 29, I recommended buying the MON Oct 105 Puts for $7.50. Shares had fallen from $121 just days earlier to $103 when we initiated the position, and continued dropping like a stone.
In fact, on Oct. 2 -- just four trading days later, MON was downgraded by Merrill Lynch to "Neutral" from "Buy."
No reason was given, but frankly, I didn't care, because the stock was down almost 20% and our option was deep in-the-money. We closed the puts at $24, a sweet 220% gain in just under a week!
Shares have fallen further to $75, pushing the puts into the $29 area. But with this crazy market, where anything can (and does) happen in the span of one trading day, I'm not one to pass up a fantastic profit like the one we banked.
Besides, there are plenty more opportunities coming our way. Find out how you can get them delivered straight to your inbox -- FREE!
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