I wrote an article about Altria Group (MO) back in mid March. At that time I believed the stock was very bullish with no signs of bearishness in the trend yet. Because of this, not only was I bullish in the stock, but I also wrote about a short term income strategy I thought would work out well. Here is the original play:
The Options Play
- Buy a September '31' 2012 call option (priced at $0.61)
- Sell a September '32' 2012 call option (priced at $0.31)
- Net Debit to Start: $0.30
- Maximum Profit: $0.70
Reasoning behind the Trade
- Altria Group is bullish and we believe it will remain strong, not turning bearish.
- It has a 52 week high figure of 39, well within our trade.
- September gives us a time for a pullback.
Altria was trading at 30.08. Presently it is trading at 34.55. For this reason I closed out the play.
- Sell the September 2012 '31' call priced at $3.65
- Buy back the September 2012 '32' call priced at $2.79
- Gross Profit: ($3.65 - $2.79)= $1.14
- Net Profit: (Gross Profit - Net Debit) ($1.14 - $0.30)= $0.84
- ROI: 280%
Now, the question arises: Can we make money on this stock again, or is it getting ready to turn around? Let's make note of what these companies have continued to deal with - and this includes Altria Group Inc. and Lorillard Inc. Governments continue to squeeze these companies through tighter and tighter regulations. It is no secret that governments around the world continue to impose an increasing number of restrictions on tobacco companies with the goal of reducing or eliminating smoking in their respective countries.
Altria has been diversifying, and this has continued to help it grow. Cigarette volume did not grow, but a price increase brought in more revenue and its wine segment grew well. Furthermore, Altria accomplished its $1 billion cost reduction program for the period of 2007 to 2011, surpassing its $1.5 billion goal vis-a-vis its 2006 cost base. It also initiated a new $1 billion cost reduction program for its tobacco and service company subsidiaries.
Some analysts believe there is too much headwind for the tobacco companies to keep growing, but I am of the opinion that as long as the dividend factor is a prime catalyst for investing and growth, these companies will continue to grow. They may slow down, but investors are looking for growth and the dividend is what is yielding that right now. I think they will grow. I have another bullish income play, and I believe the stock be may slowing down. So I have adjusted it accordingly.
Click to enlarge.
The Options Play
Presently trading at 34.55. I like buying (in the money) and then selling one out with a Bull Call Spread in Altria.
- Buy a September 2012 call with a strike of '34' (priced at $1.17)
- Sell a September 2012 call with a strike of '35' priced at $0.56)
- Net Debit to Start: $0.61
- Maximum Profit: $0.39
- Maximum Risk: net debit
- Maximum Length of Play: 3 months
Reasoning behind the Play
- Because I believe it is slowing down, starting the play in the money makes sense.
- It is still bullish and not showing any other sign.
- Headwinds could slow the stock but not turn it bearish.
- Dividends are still hot and tobacco companies have the high dividends!