When we last wrote on Procter and Gamble (PG), we observed and made note of the stock's steady climb up. It resembles a steady bullish rolling hill formation, moving up and down between the upper and lower Bollinger Bands. Since it presently sits at the top again, one would consider a "predictable correction" should be afoot.
Interestingly enough, Ivan Kitov of Seeking Alpha wrote an article recently about Procter and Gamble. In that article, he discussed a price correction coming to the stock before May. It is a great article to read. Toward the end of that article this is what he writes about a price correction:
"The model does predict the share price in the past. There is a nonzero probability that the price will fall to $60-$62 by May 2012."
If we follow our lower trend line for the company, we would be leaning toward the (61-63 level). In any event, the timing is perfect for the move. Procter & Gamble moves quite often for 30 days at a time in either direction.
(click to enlarge)
We believe this company will continue to be a solid long term investment. It is well positioned for the future and has great expansion plans for China. It is building a new manufacturing plant in Guangzhou, China presently that should be up and operating by 2013. This facility will be one of the largest in China and eventually the company will be investing $1 billion dollars. This plant is expected to ad $490 million in what they call "production value" every year. This is just one example of how Procter & Gamble plans to be growing overseas and increasing revenue as a global company.
While it is a good long term investment, it also has been so predictable and steady that it might be advantageous to explore making money on a short term basis also. Since it presently sits at the top of the Bollinger Bands and we expect it to move down, a Bear Put Spread might be a good play for the stock.
The Options Play
Trading at 67.13, we will look to make a play just out of the money.
- Buy an October 2012 '65' call (priced at $2.60)
- Sell an October 2012 '62.5' call (priced at $1.72)
- Net Debit to Start: $0.88
- Maximum Profit: $1.62
Reasoning behind the Trade
- We believe the stock is due for a correction.
- It consistently moves up and down between the Bollinger Bands and it is time to move down again.
- The trade is well within our expected movement level.
