Monsanto (MON) reports earnings this Tuesday, and the company is expected to report a loss of 43 cents per share. Traditionally, the fourth quarter is the weakest for the company, as the one-time expenses are greatest at this time in the fiscal year. Monsanto has reported strong earnings lately, beating estimates 4 out of the last 5 quarters, and matching estimates once.
As a result, the stock has performed well over the past several quarters. A year ago this week (October 5th, 2011), the company reported a loss of 22 cents a share, which beat the analysts' estimates (which was a loss of 27 cents). The stock gained 25.4% over the two weeks following the report. The next three reports were on January 5th, April 4th, and June 27th of this year. As previously mentioned, the stock met or beat estimates every quarter, and, on average rose 5.91% in the two weeks following the announcements. The worst performance was the April 4th announcement, where the company beat estimates but lowered guidance, and the stock only dropped 6% in the following weeks, rebounding to pre-earnings levels before the next announcement.
As the chart shows, MON tends to beat estimates, and the stock performs well even when it doesn't beat. I want to take advantage of the pre-earnings spike in volatility and perform the following trades.
- Buy the January 2013 $85 calls for $8.25 and simultaneously sell the January 2013 $95 calls for $2.77, for a net debit of $5.48. This trade makes money if MON is at or above $90.48 at expiration, which is 54 cents less that Friday's closing price of $91.02. If MON continues its average 6% post-earnings gains, the share price would be $96.48 within a few weeks, at which point the investor would close the position, which would be worth close to its maximum possible value of $10.00. Actually, in this scenario, the spread would be worth around $7.80, according to my options calculator, representing a 42.3% gain over the original investment.
- For a longer term position, especially if there is an interest in actually owning the stock, sell the January 2014 $85 puts for $14.30. This would provide you with instant income, as well as downside protection, should the stock drop. The trade makes money as long as the stock is worth over $70.70, or 22.3% less than the current price. Ideally, Monsanto will continue to rise, and the $1,430 collected from selling the put will be a nice 17% profit, compared to the cash the trade will tie up.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.