Church & Dwight (CHD) stock dropped on the company's earnings report Thursday, but you should expect it to bounce higher again. We'll explain how you can use stock options to profit from such a move.
The maker of Arm & Hammer baking soda reported earnings before the bell Thursday. Adjusted earnings per share were 47 cents, in line with analysts' expectations. Revenue, however, missed the Street's estimates, and the company lowered its guidance for the current quarter.
In reaction, shares fell more than 3 points on Thursday, to $44.12 from $47.25. Analysis of the stock's chart tells us that shares should bounce back into their recent range.
The stock's price gapped below the lower Bollinger Band. A look back at the chart reveals that when this occurs, the price invariably returns to the previous range very quickly. Established support was $47 per share, three points above the close on Thursday of $44.12.
Confirming the likely bullish turn was a volume spike and a move by momentum into oversold territory. The relative strength index, which measures momentum, closed at 25.93, more than 4 points below the important oversold threshold of 30.
So the stock should regain at least some of its losses.
Given that outlook, we took a look at a synthetic long stock trade.
The options that expire on Dec. 16 (in 43 days) are attractive at the moment if, in fact, the price does rebound. A synthetic trade can be opened with the following positions:
Buy the 45 call option at an ask price of 1.00. The total cost is $109.
Sell the 45 put option at a bid price of 2.00. The net credit is $191
Overall net credit = $82
Subtracting the overall net credit from the $45 strike price, we get a break-even level on the trade of $44.18. The stock closed Thursday at $44.12, only 6 cents from this level. Any increase in the stock price will make the long call option profitable. If the stock does move above the $45 strike, the put will expire worthless or can be closed at a profit. If the stock's price moves below $45, the short put can be closed or rolled to avoid exercise. Overall, the $82 net credit provides advantages for this synthetic trade.