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Option Idea of the Week: The J.M. Smucker Company (SJM)

Could another bounce be on the horizon for SJM?

by 9/6/2013 10:49 AM
Stocks quoted in this article:

The J.M. Smucker Company (NYSE:SJM) has performed solidly in 2013, advancing close to 23% year-to-date, and outpacing the broader S&P 500 Index (SPX) on a relative-strength basis during the most recent three-month time frame. Meanwhile, a look at the charts shows that the security's recent dip has been cushioned by its 100-day moving average, which has acted as support since August 2012. In fact, this trendline also contained an early summer pullback, after which the shares bounced to a fresh all-time peak of $114.72 on Aug. 6. Given this technical fortitude, the equity could be poised for further gains, especially in light of the bearish sentiment hovering over SJM.

Daily Chart of SJM since June 2012 With 100-Day Moving Average

Digging deeper into the data, the stock sports a 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 8.56, confirming traders have bought to open roughly nine puts for every call during the last two weeks. This ratio registers higher than 96% of comparable readings taken within the previous 12-month period, conveying traders have snapped up puts over calls at a faster clip just 4% of the time during the past year.

Similarly, Schaeffer's put/call open interest ratio (SOIR) for SJM sits at 2.33, with calls more than doubling puts among options set to expire in the next three months. This ratio is just 4 percentage points from a 52-week acme, indicating short-term speculators have rarely been more put-focused toward the security over the past 12 months. This bevy of put open interest -- particularly within the September series of contracts -- could end up translating into options-related support in the near term.

Elsewhere, although short interest on the food-products giant declined by close to 16% during the last reporting period, more than two million shares of the equity's float are still sold short. It would take nearly six sessions to cover these bearish bets, at the stock's average daily trading volume -- signaling a respectable amount of available sideline cash. In other words, the shares could benefit from future short-covering activity, should SJM extend its year-to-date gains.

Also of note, only seven of the 15 covering analysts have handed out a "buy" or better endorsement, while the remaining eight maintain lukewarm "hold" recommendations for the security. Furthermore, SJM's consensus 12-month price target of $113.73 represents a modest premium of 7.6% to the stock's present perch at $105.72. This leaves plenty of room for a wave of upgrades and/or price-target hikes, which could help push the equity higher.

Traders hoping to wager on another bounce for The J.M. Smucker Company (NYSE:SJM) may want to think about buying the stock's in-the-money January 2014 100-strike calls, which are currently asked at $8.60. Those wanting to lower the cost of entry (and are willing to cap potential gains) could simultaneously sell a January 115 call, currently bid at $1.25. It should also be noted that the firm is tentatively scheduled to report quarterly earnings between Nov. 11 and Nov. 15.


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