Skip to main content

Monsanto’s stock makes way while sun shines

Monsanto surges nearly 5% after announcing that the seed making conglomerate will effectively extend and increase its stock buyback after its current repurchase campaign finalizes on July 1. This new program will increase to purchase $2 billion worth of company stock over the next three years. This news from the agriculture behemoth comes as Standard & Poor’s raised its credit rating to “stable” from “negative.”

MON earns its keep from three main sources of generating revenue: agricultural chemical sales, designing and selling biotechnology traits, and collecting royalties on the aforementioned traits. When estimating expected returns, Monsanto management analyzes historical returns, economic trends, market conditions and changes in consumer demand.

Corn seeds make up for three quarters of Monsanto’s seed sales; the USDA projected 2013 production to top 2012 by 32%. This is good news for MON; the more seeds, the merrier-- corn seed has been on a 16% tear. Herbicides to cater the strains of GMO grains are one of three major tributaries of revenue. Corn seed demand domestically and in South America, along with China warming up to import GMOs have lead analysts at Macquire to upgrade the stock to “outperform.” Despite the visible demand, Monsanto’s products are a thin spread above generics. A trader in the market seem to agree.

This morning, 2,500 Monsanto Oct 95 puts were purchased at $2.48 and paired with a sale of 2,500 Oct 80 puts for $0.62. The purchase of these puts indicates an option to sell over $23 million shares of Monsanto, while the sale of the puts indicates a commitment to purchase $20 million shares of Monsanto.

This strategy to combine the purchase of puts along with the sale of puts at a different strike price is a way to both limit risk and limit reward; the limited reward has a larger range of profitability as compared to a normal purchase of a put. The trader might not be so sure where the price of Monsanto will be in October, however they do believe that the price of Monsanto will ease over the next couple of months – the breakeven point of this trade is at a price of $93.14 per share, with profits below this price and losses above. The maximum loss the trader can incur is $465,000 if the price of the stock is above $95 at the October expiration. On the other hand, the maximum reward the trader can gain from this trade is $3,285,000 if the price of the stock is below $80.

Today the stock opened at $105, and therefore between now and October the trader will make their maximum profit if the stock drops by 23.8%. In order to be in the black, the price would have to drop by 11.3%. 

This expectation by the trader seems pretty drastic, and this could possibly be a hedging strategy that the trader has used to protect their long position in the company. For instance, if the trader was going to be profitable above $95/share, then they would only take a slight dip in reward (-465,000). However if the trader was going to lose a lot of money below $80/share, this could be comfortably offset by a gain of over three million dollars.

Comments

YCBASMG said…
The expression is "makes hay while the sun shines." This is a literal expression. When your hay has grown tall enough to harvest, you need a couple of days of sunny weather. First you cut it, but then you need the sun to dry it out before it can be bailed. If it wet when bailed it will be spoiled. If it rains after being cut you will never be able to dry it out before it molds and the crop will be be spoiled. The expression is now used to apply to other things and means to take advantage of the ability to prosper when the opportunity arises or conditions are right.

Popular posts from this blog

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."


Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. 
Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). 
So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…

The market should take Trump seriously this time.

Kim Jung-Un gave the U.S. an unwelcome birthday present as he test launched an ICBM capable of reaching Alaska.  North Korea has made it very clear that their intention is to grow their nuclear capability to be able to reach the Continental United States.  This would destabilize the region, and world overnight.
Now I don’t expect the war drum beating will spill over into mortar shells raining down on Seoul anytime soon.  There has been a choreographed diplomatic dance going on for the past 40 years with North Korea that is likely to continue as follows; North Korea acts out, U.S. gets upset, U.S. sanctions them (with help from China).  North Korea gives up their acting out activity (promises they won’t do it again), a North Korean South Korean gesture of goodwill takes place, such as joint Olympic teams, joint economic projects, North Korea gets to declare victory.
However, this go around seems slightly different.  Now we have a President who has made it very clear in his campaign tha…