Lorillard Inc. (NYSE: LO, $66.31) is a Greensboro, NC-based tobacco company marketing cigarettes under brand names including Newport. So far in 2015, shares haven’t had any adverse health effects on investors – the stock is up nearly 5.5% year to date. The long term impact has been positive as well – shares were up over 26% on the year in 2014, after posting solid gains the year prior. In fact, since spinning off from parent Loews in 2008, it has been a steady climb higher for LO.
Lorillard is scheduled to report earnings after the close today, with consensus analyst estimates calling for EPS of $0.93 on $1.29 billion in revenue, compared with EPS of $0.86 on revenue of $1.25 billion on year prior.
Despite the strong stock performance, earnings performance has been mixed. LO stock has fallen following earnings on 3 of the past 4 quarters, but has rallied 5 of the past 8. Five of the past 6 earnings announcements also saw moves of 1% or less, so this scenario sets up well for selling volatility and being short premium. The mean move over the past 8 quarters is 2%, with the LO Feb Weekly 66 and 66.5 Straddles implying a move between 9.9% and 14.8%.
Because the weekly options are so thinly traded, I look to the Feb standard expiration LO Feb 66 Straddle, which is implying a move of about $3.00.
My Trade
- Sell the LO Feb 66-65 Put Spread for $0.35 Credit
- Risk: $65 per 1 lot
- Maximum Reward: $35 per 1 lot
- Break-even stock price (at expiration): $65.65
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