This Tobacco Stock is Ripe for a Bearish Options Trade

PM stock recently ran into a trendline with historically bearish implications

Jul 23, 2018 at 11:33 AM
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The shares of Philip Morris International Inc. (NYSE:PM) are trading 1% lower today at $83.51, after Berenberg cut its price target on the tobacco stock to $85 from $100. This negative price action echoes PM's longer-term downtrend, but a short-lived rally attempt into a key trendline could indicate the equity is headed on its next leg lower.

Specifically, a quick bounce off its post-earnings lows brought the stock right up to its 80-day moving average. According to Schaeffer's Senior Quantitative Analyst Rocky White, in the eight most recent times PM has come within one standard deviation of this trendline after a lengthy stay below it, the security has gone on to average a one-month loss of 2.46%, with more than half of those returns negative.

pm stock daily price chart july 23

An extended bout of selling wouldn't be anything out of the ordinary for PM stock. Year-over-year, the shares have shed 30% of their value. More recently, the stock has been stuck churning below the site of its late-April bear gap lows, and tagged a two-year low of $76.21 on June 6.

Additional bearish brokerage notes could create stiffer headwinds for Philip Morris shares. Despite the stock's dismal technical backdrop, 11 of 12 analysts maintain a "buy" or better rating, while the average 12-month price target of $94.06 stands at a healthy 12.5% premium to current trading levels.

There's room for short sellers to ramp up their bearish exposure to the stock, which may exacerbate selling pressure on the shares. Short interest fell 6.2% in the most recent reporting period to 9.46 million shares. This accounts for just 0.6% of PM's available float, or just 1.5 times the average daily pace of trading.

Those wanting to bet bearishly on PM may want to consider doing so with put options. The stock's Schaeffer's Volatility Index (SVI) of 18% ranks in the 24th annual percentile, pointing to attractive short-term options premiums, from a volatility perspective. Plus, the security's 30-day implied volatility skew of 9.2% ranks in the 23rd percentile of its 12-month range, meaning puts are pricing in lower volatility expectations than their call counterparts.


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