Underspiced

Spice maker McCormick (MKC) reported earnings this week that had no sizzle. Revenue and earnings both missed expectations by more than a little. The CEO said that “supply chain challenges continued, and recovery of certain constrained materials has taken longer than expected.” I’m not sure what that specifically means, but it doesn’t sound good.

The stock reacted with a brief burst on Thursday, but eventually finished lower. This shouldn’t be a surprise, though, as the stock has been in a pronounced decline since mid-August. The downtrend has covered more than 20%, pulling MKC to its lowest level since the COVID crash in early 2020. Moreover, the descent has been perfectly contained by the 20-day moving average, which hasn’t allowed a single close above it since Aug. 23.

If you agree that MKC will continue to decline under the weight of the 20-day (blue line), consider the following trade that relies on the stock staying below $75 (red line) through expiration in six weeks:

Buy to Open the MKC 18 Nov 80 call (MKC221118C80)
Sell to Open the MKC 18 Nov 75 call (MKC221111C75) for a credit of $1.45 (selling a vertical)

This credit is $0.05 less than the mid-point price of the spread at Friday’s $73.44 close. Unless MKC sags quickly, you should be able to get close to that price.

The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $143.70. This trade reduces your buying power by $500, making your net investment $356.30 per spread ($500 – $143.70). If MKC closes below $75 on Nov. 18, both options will expire worthless and your return on the spread would be 40% ($143.70/$356.30).