Is There an Opportunity to Get Long Monsanto Company (MON) Ahead of Earnings?

Monsanto Company (MON) is producer of products for farming and other agricultural industries. The company’s stock is currently trading around $113.35 in a 52 week range of $84.79-$114.17. The stock has been strong over the past year with shares rallying more than 25% over the past 12 months. It appears like the stock could be setting up well for even more upside after the company reports is most recent quarterly earnings report next Wednesday before the market open. To confirm this setup we will examine the stocks historical movement record on earnings day, the expected movement being priced into the options market, and the current technical setup.

First we will examine the stocks historical earnings performance record. To isolate trends in price action on and around earnings we will look at the stocks performance on earnings day and from earnings day until the nearest options expiry. This will help us spot patterns in the stock’s performance around earnings. We can see that over the past 12 quarters shares of MON have rallied 8 times with an average move of 2.54%. The stock has also rallied 8 times in the past 12 quarters from earnings to the nearest options expiry. This does not tell us that the stock is guaranteed to rally this quarter, but it does show us that the stock has a strong tendency to rally on earnings day. With this in mind we will calculate the expected movement being priced into the options market this quarter.

To determine the expected movement market makers are pricing into the options market we will use the price of the stocks at the money straddle in the nearest dated options expiry that still contains the catalyst. In this case we will use the April 7th weekly options. Below is the current market for the MON Apr 7th Weekly 113 Straddle.

MON

Here we can see that the current mid-market price of the straddle is around $2.50. This represents an expectation for the stock to move higher or lower by 2.2% by April 7th expiry. Using this expected move we can calculate an upside and downside target for MON after earnings.

Upside Target = $113.35 + $2.50 = $115.85
Downside Target = $113.35 – $2.50 = $110.85

With these levels in mind we will analyze the stocks chart to confirm the bias in historical movement. Below is MON on the daily bar.

MON

Here we can see that the stock is trading well above the Ichimoku Cloud and is firmly in a bullish trend. This chart does nothing to invalidate the bullish bias in historical movement and tells us that we cannot justify anything but a long in MON.

Possible trade: Buying the MON Apr 7th Weekly 114-116 Call Spreads for $0.60
Risk: $60 per 1 lot
Reward: $140 per 1 lot
Breakeven: $114.60

This trade is arrived at after taking into consideration the stock’s historical movement record, the implied move, and the stock’s chart. This method can help traders make smarter trades ahead of catalyst events.

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