Sometimes aggression is considered a good thing. "That kid's aggressive. She (or he) is really going to go somewhere." Sometimes not so much. Take "Operation Barbarossa" for example. I had not thought of Altria (MO) in a good while, which is odd, because I have been steering my portfolios in a more revenue focused direction of late. Who isn't. Not to mention that I drove past the firm's plant in Richmond, Virginia the other day and that I like chewing tobacco, though not the powdery snuff sold through Altria's brands. I am more of a leaf guy.
Then a friend who I think of as a gifted trader, we'll call her Laura, mentioned in passing that she had taken down a long position in Altria. I though to myself... hmm, maybe I'll tag along on that one. Well MO popped overnight, gang. Altria, it turns out was feeling aggressive. As November wore down, the firm flirted with the possibility of taking a minority stake in e-cigarette manufacturer Juul. This would seem perhaps appropriate given the recent concern over the impact of FDA regulation upon tobacco names.
Instead, Altria turns and takes on a 45% stake in Cronos (CRON) , the Canadian cannabis name for a rough $1.8 billion with a warrant to acquire an additional 10% of the firm at a later date and higher price per share. Interesting. CRON has reacted extremely well at +23%. That might be expected, but MO is reacting well also. Not in every deal does the one spending the cash see a positive reaction on a negative day for the broader markets. Nice job, Laura. Now, for you and I... is it too late to jump on board? The answer is maybe.
Let's Take A Look
I took the liberty of stretching this chart out in order to illustrate the broken Pitchfork, as well as the regular support that this name has enjoyed every single time that the $53 level is tested. The question is this. Does Altria belong in a dividend based portfolio? The stock pays 5.9%, so that's easy. Yes. Do you have a moral problem investing in a tobacco name? I don't, but you might. I respect that. So, how do we go about this?
Trade idea (minimal lots)
-Purchase 100 shares of MO at or close to the last sale of $55.70
-Sell one January 2020 (a year out) $65 call (implied value $1.82)
This reduces the trader's net basis to $53.88. Don't forget that the quarterly dividend is 80 cents. In a year, that net basis will work it's way down to $50.60 while the trader sits on the couch eating yodels. See where I am going with this? The same trader could sell a January 2019 $53 put for 82 cents, and that will pay for dinner, but it will not pay a regular dividend unless the stock reached that level. Food for thought.