Anticipate the Food Fight! Options versus History

• Posted by Greg Harmon
• on February 16th, 2012

Two giants of the processed food world, Campbell’s Soup, $CPB, and HJ Heinz, $HNZ, report earnings Friday morning before the open. They did not make the cut for an earnings trade but that does not mean you should not be prepared for them after they report. Each offers an opportunity to turn a quick buck depending on whether you believe in history or the options market. Let me explain.

Campbell’s Soup, $CPB

Campbell’s Soup, $CPB has been making a series of lower highs since falling from a retest of the Diamond Top breakdown at 33.50 the first of the year. It is now finding resistance at the 32 area with all of the Simple Moving Averages (SMA) above it. The volume at price bar shows that there is major trading history between here and 32.75 and a look to the left reveals part of that from the March through May 2011 timeframe. The Relative Strength Index (RSI) is bearish but trying to move higher into bullish territory while the Moving Average Convergence Divergence (MACD) indicator is positive and growing. These support more upside. This stock has had an average move of 2.9% each of the last 6 earnings reports making for an expected move of about 92 cents tomorrow. The Options market basically agrees with that pricing in an 85 cent move in the February 32 Straddles. An upside bias with an expected 92 cent move. This would be near the middle of the previous Diamond on the upside and the November low on the down side. What are you going to do if it starts higher?

HJ Heinz, $HNZ

HJ Heinz, $HNZ, starts with a similar set up. Consolidation with lower highs right around the SMA’s after coming off of a high at the beginning of the year. It too has an RSI that is begging to break above 50 and then move into bullish territory and a MACD that has crossed positive, but a lot of previous price history at the current level. Also a slight upward bias. This name has had much more muted reactions to earnings though with an average move of only 1.2% in the last 6 quarters or 61 cents in today’s price terms. But the options for this name are protecting against a move of over 4 times greater at $2.75. Id there really something special going on with Ketchup this quarter? The options implied move would take it to retest the high of the year, or the December low. Once it gives you a direction it might be worth taking a ride.

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