Cintas (CTAS) may not be an exciting business – it sells uniforms, cleaning and toiletries, first aid supplies and fire extinguishers – but the latest earnings report was anything but boring. The company slightly exceeded profit forecasts and slightly exceeded sales forecasts. Even the lower end of the company’s forecast EPS range for fiscal year 2022 is well above the analyst estimate. The only stain on the report was the projected sales estimate, which was below projections. Even so, the report was greeted with a series of target price increases that went as high as $ 450 (the stock closed at $ 386 on Friday).
The initial reaction to gains was a 2.6% drop on Thursday. But the stock rose 4.6% on Friday and continued its recent breakout above a trading range that dominated 2021. More importantly, the stock found strong support at the 365 level (red line on the chart), which defined the top of trading going back to November. CTAS only trades monthly options in 10-point increments, so we use the 380 short strike (green line) for a put credit spread. This is just above the stock’s 20-day moving average (blue line).
If you agree that CTAS will stay above its 20-day moving average, consider the following trade, which depends on the stock staying above 380 to expire in five weeks.
Buy to Open CTAS 20Aug 370 Put (CTAS210820P370)
Sold to Open CTAS 20Aug 380 Put (CTAS210820P380) for $ 3.15 credit (sale of an industry)
This loan is $ 0.05 below the mean of the options spread when CTAS was trading at $ 386. Unless the stock recovers quickly from here, you should be able to get close to that amount.
Your commission on this trade is only $ 1.30 per spread. Each spread would then be $ 313.70. This trade reduces your purchasing power by $ 1,000 and your net investment is $ 686.30 ($ 1,000 – $ 313.70). If CTAS closes above $ 380 on August 20th, both options will expire worthless and your return on the spread would be 46% ($ 313.70 / $ 686.30).
This entry was posted on Sunday, July 18th, 2021 at 6:02 pm and is filed under Stock Option Trading Idea of the Week, Uncategorized.