Fastenal (FAST) manufactures construction supplies such as screws, bolts and studs. It sells mostly into heavy machine, railroad, framing and mining should be benefiting from improved economic activity across those sectors and any potential infrastructure spending. And it’s going to serve as a useful options trading lesson for today.
The company is set to report earnings on Wednesday, Jan. 17 before the market opens. Analysts are expecting revenue of $1.02 billion and EPS of $0.45 which are 14% and 8% increases over the year ago period.
But the company’s record is mixed, with several misses over the past 12 quarters.
And profits have been hurt by margin pressure, as the company has pushed top line growth through acquisitions and aggressive pricing.
I think new tax policy is not priced in, and should offset the margin issue, but the stock has already gained some 22 percent since its last report. It currently trades at a relatively rich 26 times forward earnings.
The current implied volatility is 68 percent, meaning the weekly options are pricing in approximately 4.9% or $2.70 movement in the three days following the report.
I want to be bullish, but I have a lower degree of confidence, and think the upside is limited.
Therefore, I am using a low cost butterfly with only half the typical allocation.
This will provide us with good profit potential while limiting risk in our options trading.
Action:
- -Buy to open 4 contracts FAST Jan. (1/19) 55 Call
- -Sell to open 8 contracts FAST Jan (1/19) 57.5 call
- -Buy to open 4 contracts FAST Jan (1/19) 60 Call
For a Net Debit of $0.70
Here is what the risk/reward profile of the trade looks like.
As you can see, if shares move up within the expected range towards $57.50, the butterfly spread will be worth $2.50 for over a 300% gain. That’s some nice, fast profits.
