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.