What We're Trading: Red Flags Abound on Well-Loved Medtronic PLC (MDT)

We think MDT shares are ready for a sharp move lower, so it may be time to purchase put options

Dec 28, 2016 at 8:16 AM
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Medtronic PLC (NYSE:MDT) stock is down more than 6% year-to-date, and is nearing its annual low touched in early February. Not to mention, shares of the medical technology specialist dropped nearly 9% on Nov. 22, following lackluster quarterly sales and a reduction to the company's 2017 earnings forecast.

 

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Despite the technical and fundamental red flags, MDT is well-loved on the Street. Sixteen of 22 analysts have doled out "buy" or better recommendations, leaving the door wide open for downgrades. Elsewhere, short interest has plunged of late, leaving just 0.8% of the stock's float sold short. A resumption in short selling could add to the headwinds.

Meanwhile, at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 1.59 calls for every put during the last 20 sessions. An unwinding of this optimism could exacerbate MDT's struggles.

Speaking of options, short-term premium can be had on the relative cheap at the moment. Specifically, MDT's Schaeffer's Volatility Index (SVI) of 17% sits beneath 65% of all comparable readings from the past year. And, last but not least, our recommended put option boasts a leverage ratio of negative 13.5, meaning it will double in value on just a 6.4% decline in the stock.

Subscribers to Schaeffer's Weekend Series service received this MDT commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters. Learn more about why Weekend Series is one of our most popular trading services.

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