Hormel Foods (HRL) stock dropped Wednesday following the company's earnings report, but shares should recover soon, and investors can profit from that recovery using stock options.
The food company said earnings per share were 40 cents for its fiscal second quarter, beating the analyst consensus by a penny. Hormel also increased its fiscal 2016 EPS guidance to $1.56 to $1.60 from its previous forecast for $1.50 to $1.56. Revenue was also positive, growing 0.9% year over year. But even with this positive report, the stock price dropped $3.32.
That decline isn't likely to last long. Technical analysis reveals several bullish signals for this stock.
Support was established at $39 per share at the beginning of February, and the stock has traded above that level, except for a failed breakout lower from mid-April to early May. The price dropped significantly below that support level after earnings were reported, closing on Wednesday at $35.48. This presents a likely bullish scenario with price likely to turn and move back up into its previous range in the near term. Confirming this likely bullish move was a large volume spike -- the largest in the past six months -- and a move of momentum as measured by relative strength index into oversold territory for only the second time in six months.
Collectively, these signals indicate good timing for a bullish trade. Take a look at the June 17 stock options, which expire in 29 days. A bullish put spread contains minimal risk and a likely profit of $117. This spread consists of two individual options positions. First, you buy a June put option with a $35 strike price. This option closed on Wednesday at an ask of 0.95. Including trading fees, the total cost of this put is $104 for a single contract. Second you sell short a June put option with a strike price of $37.50. This option closed on Wednesday with a bid of 2.30. Net proceeds from selling this option are $221, after trading fees. The net credit for this position is $117.
With the expectation of a fast turn to the upside, this trade offers an attractive short-term profit.