Philip Morris (PM): Option Trade Looks for Flame to Burn Out

I do a lot of work after hours scanning for any action in the options market I may have missed during the day, and this spread in Philip Morris really caught my eye as a large trade that makes a lot of sense with the current Technical and Fundamental outlook.

Philip Morris (PM) with a large spread in August as the $65/$60 ratio put spread traded 3,000X6,000 on the ISE at a debit of $0.42 to open. The spread profits with shares in the $55.42 to $64.38 range (Shown Below)




The spread comes as shares sold off on heavy volume and broke back below its 50 day EMA. Shares also broke through the neckline of a head and shoulders pattern that would target the 200 day EMA just below $62. Today's breakdown was the start of a new trend, according to DeMark and the ADX Crossover. The chart below shows the Head and Shoulders Breakdown:



The $118.5B cigarette maker has been on a major run and is finally showing weakness, and shares now trade 16.3X earnings, 1.73X sales and 25.5X cash flow, and the yield is now only 3.84%, so shares do look over-valued. The trade also comes as the FDA released new grisly warning labels to try and deter smoking, a potential impact to profits moving forward.

BofA raised its target to $78 in early June, noting strong pricing power. However, the Japan and Spain markets could see weakness due to recent events, and with the economy struggling, the spending on cigarettes could become more discretionary.

Ratio put spreads are often used as protection, and the small outlay here can yield a big return if shares head towards $60, while the risk is limited , because shares are not heading back below $55 due to value/yield buyers.