I Hate Cheerios

• Posted by Greg Harmon
• on March 20th, 2012

I am probably the only person on the planet that does not like Cheerios. My parents eat a half a box religiously every morning. My kids love them. They even had that book where you put the Cheerios in the cut out spots to make wheels for cars and things. That was cute. They are supposed to be great for your heart. But I think they taste like cardboard. I can eat my banana’s and blueberries au natural. No cardboard needed. If that was not bad enough, General Mills, $GIS, the maker of Cheerios has an awful looking stock chart. Try pronouncing their stock ticker as a word as you are pouring a bowl.

General Mills, $GIS

After a long and volatile march higher from 34 in August to 41 in January it has pulled back and is now building a bear flag. It reports earnings in the morning and that may be the catalyst to break the flag lower. A breakdown has support lower at 38 and 37.40-37.60 followed by 36.70 , 36 and 35.11. Above there is resistance at 39.10 and 39.60 followed by 40, 40.40 and 41. The Relative Strength Index (RSI) is bearish, but rising and the Moving Average Convergence Divergence (MACD) indicator is positive but at stalled. This chart has a downward bias despite the current movement higher in the flag. The reaction to the last 6 earnings reports has been a move of about 1.5% on average or $0.58 making for an expected range of 38.12 to 39.28. The at-the money April Straddles imply a larger move of $1.20 by Expiry. Implied volatility at 13% is near the historical at 14%, and the May options at 11%. There has been big volume on the April 41 Call with over 1200 contracts traded against Open Interest (OI) of 4778, but at 6 cents who cares.

With a chart that is pointing lower and my disgust for their product I will be betting on a downside move for earnings.

Trade Idea: Buy the April 36/37/38 Put Butterfly for 20 cents.

This trade has a maximum 5:1 payout if the stock closes April Expiry at 37 and risks only the initial 20 cent premium. With the Implied Volatility flat, it is likely to be unwound for little or no cost if the stock does not move tomorrow. Yes I hate Cheerios, but I like money. And if Cheerios can make me money then maybe I can be turned around as well.

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