Trading on Nothing But Hot Air (APD)

This week’s trade brings us to Allentown, PA – but not for that city’s widely acclaimed ‘Great Fair’.

In fact, we’re a bit short on Allentown these days.  For all their virtues, the good people of that municipality have permitted a ballooning of sorts to occur right under their noses – a gaseous bubble-up of one of the town’s largest business enterprises that we can no longer countenance.

The company in question is Air Products and Chemicals, Inc. (NYSE:APD), industrialists in the business of gas creation, packaging and delivery.

Ahem…

The low-down on APD is as follows –

• P/E is 33,
• P/B is 5.65, and
• Yield is 1.85% (not bad there).

The company advised Wall Street in April that it had no clue what was coming (because of the Bat Flu) and withdrew guidance for the year.

It did comment, however, that it expects a decline in sales in the American market through 2020.

In early July, APD partnered with two other parties on an ammonia production facility in Saudi Arabia, from which they intend to suck the “green” ammonia to sell to the global transport market (don’t try this at home).

And with that, we wish them luck.

A Worthwhile Investment?

The market was apparently quite happy with the news, as the stock shot higher by some 7% post-announcement and has kept on climbing.

Our feeling, however, is that the whole affair is now extremely bloated, and we’re expecting some wind to come coursing through the valves in short order.

Earnings are out tomorrow.

Here’s how the stock has performed over the last six months –

Technically, the bulls have reason to worry –

1. An overbought RSI signal (in green) is, in itself, a ‘sell’ alarm.
2. Coupled with a MACD rollover on the making,
3. A volume spike (in black), and
4. A perfect Fibonacci 1.38 extension that brought us to the latest highs, and you have all the makings of an interim top.
5. Two gaps – at 251 and 265 (in blue) – may also have to be filled before any pullback is complete.

For all of the foregoing, we’re now APD bears.

And we’re playing it with a calendar straddle.

Like this –

A Jew and His Gold recommends you sell the APD August 21^st 290 straddle for $19.80 (CALL – $11.00; PUT – $8.80) and buy the September 18^th 290 straddle for $29.10 (CALL – $15.80; PUT – $13.30).  Total debit on the trade is $9.30.

Rationale: A calendar straddle is meant to profit from eventual explosive action in the underlying when direction is unclear.

Maximum loss on the trade is theoretically limited to the cost of establishing the position (in the above example, $9.30, although with calendar strategies, it’s nearly impossible to compute genuine max/mins.

Maximum gain is theoretically unlimited.

Breakeven is the strike price plus or minus the initial premium taken.  In this case, 290 +/– 9.30.

Of special note: on many platforms, the calendar straddle requires no margin to enact.

Many happy returns,

Matt McAbby

Follow @HughLOHaynew