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Fortune Faders Grow Bold (FBHS,SPGI)
Posted on October 26, 2020
First up – and before we get to our trade – a word to all you true believers, who held on to SPGI through Friday’s close…
Congratulations!
May the Holy One always favor you and yours.
You took home the full measure of the trade, walking with $6.40 on $3.60 spent.
And that’s a slim-dandy 177%.
We’re heading into the furniture realm today (again) with a look at Fortune Brands Inc. (NYSE:FBHS) retailers of cabinets, plumbings and locks, among other things.
The shares have had a most flushing run since the Batflu bottom in March, rising 173%, and putting us squarely in the camp of those who foresee a correction.
Fundamentally, the shares are expensive, trading with –
- A P/E of 27.6,
- A Price to Book of 4.81,
- A dividend yield of 1.12%,
- And an insider class that’s also in sell mode. Over the last six months, that group has offloaded better than 44% of their holdings (nearly all in July/August as the stock crested). In total, over $40 million was banked.
Now look at the chart –
Nota bene –
- A six month trendline has now been sundered (in red),
- Immediate support emerges at $80 (in blue), with the stock currently trading at $85.
- More than that, after registering an overbought RSI signal in mid-August (in green)…
- We got negative divergence against price for two full months.
- RSI has also dipped below its waterline, while…
- MACD appears just days from confirming.
All told, this paints a bearish picture, and gives us hope that today’s endeavor will produce a rendez-vous with the widely sought, gull-winged money bird.
May she always deliver…
That said, the weekly chart also offers bearish indications.
In particular, we’re impressed by recent weakness in both RSI and MACD indicators (below, in green), both of which point to a loss of momentum.
Have a look –
Weekly RSI has turned down sharply and MACD is losing altitude just as fast.
We would expect to see the MACD rollover complete by week’s end, and lots of bears rushing to sell at that point.
We have two simple Fibonacci retracement levels as downside targets, the first (more likely) at 68, while the second arrives at 55 – the precise level of the sole gap that needs filling (in blue).
We’re going to play this with overlapping spreads – selling one to buy a second.
Like this –
A Jew and His Money recommends you consider selling the FBHS November 20th 80/85 CALL spread for $2.70 (6.90/4.20) and buying the FBHS 85/75 PUT spread for $3.10 (3.70/0.60). Total debit on the trade is $0.40.
Rationale: the trade is predicated upon a slide in FBHS’s share price.
We’re selling a CALL spread to pay for a PUT spread, thereby reducing our initial outlay to almost nil.
But because the strikes are overlapping, any expiration between 80 and 85 will offer mitigated gains or losses.
Our breakeven comes at $82.30.
A close above $85 delivers a maximum loss of $5.40.
Maximum gain on the trade is $9.60 – should price close below 75 at expiration.
With kind regards,
Hugh L. O’Haynew
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Hello Hugh,
I know you and staff are busy scouring the financial landscape for the next sterling trade, but would you have time step us through how the max loss and gain are calculated?
Thanks, Jim
Busy like bees, Jimmy!
But always time for a long-time reader.
Here’s the low-down (assuming you’re talking about this trade, specifically) –
The maximum gain on every SHORT spread is the premium gained from the sale. The maximum loss is the difference between the strikes – less the initial premium collected.
The maximum gain on every LONG spread is the difference between the strikes – less the price paid for the spread. The maximum loss is the premium paid for the spread.
Here, we have offsetting spreads, meaning the price paid for the long PUT spread ($3.10), less the premium collected from the short CALL spread ($2.70), constitutes our initial debit for the trade ($0.40).
So far, so good.
Now the beef.
Maximum profit occurs when price moves below the lower PUT strike (75). In that case, we pocket $10 (the difference between the strikes). But we paid $0.40 to set the trade, so our net gain is $9.60 (10.00 – 0.40).
Conversely, max loss occurs when price moves above the higher CALL strike (85). In that event, we’re out $5.00 (the difference between the strikes) and another $0.40 that we spent to initiate the trade, or $5.40 total.
Hope that helps.
If there are still loose ends, keep hounding us.
The Rabbis make it very clear that it’s never the student’s obligation to understand the teacher, but the teacher’s obligation to make himself crystal clear to the student.
If that takes time, so be it.
Don’t be shy.
All misunderstandings and failures to adequately convey the material are on us.
Take good care,
Hugh
Thanks so much Hugh for all the help. Is there a book on option basics that you would recommend? I don’t think I’m going to have time to come to Israel and shadow you in an apprenticeship, even though we’re trying to come first of April if you will get that lockdown lifted!
Do what you can though!
Jim
bs’d
The pleasure’s ours, Jimmy.
As for a basic guide, we’ve been out of the loop for a while.
Way back when, we used to follow Lawrence McMillan, and he’s still good.
He’s written a number of books, but his first, Options as a Strategic Investment, might be a good place to start.
That said, it also includes a good bit of advanced material that you may not need.
Maybe a website like Investopedia would be a better starting place? They have basic tutorials there.
There are other investing and option education sites that are also good.
A good understanding of spreads, straddles and strangles – long and short – will give you a start.
You can add to your repertoire after that.
In our humble view…
Always good to hear from you, Jim.
And praying for an end to all these nonsensical lockdowns.
Let the guns blaze!
Hugh