McCormick & Co. Inc. (MKC)

Update 4/6/2023: I exited my short bear call vertical spread on April 6, 15 days before expiration, after the short calls were exercised. The options and short shares combined produced for a $85.67 debit per contract/share, a loss before fees of $382 per contract. The loss is within the defined maximum risk at entry. Shares were trading at $85.25, up $12.84 from the entry level.

The Implied Volatility Rank at exit was 6%, down 33.7 points from the entry level.

The position became unprofitable almost immediately. In such cases, I hold the losing position as I wait for time decay to do its work, bringing the loss down to maximum at expiration from the higher, pre-expiration loss. In such cases, there’s always a risk that the buyer of the short options will exercise them. And so it was in this case. The exercise was triggered by the stock going ex-dividend.

Shares rose by 17.7% over 29 days for a +223% annual rate. The options position produced a 4.5% loss for a -26% annual rate.

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I have entered a short bear call vertical spread on MKC, using options that trade for the last time 44 days hence, on April 21. The premium is a $1.03 credit per contract share and the stock at the time of entry was priced at $72.41.

The Implied Volatility Ratio stood at 39.7%.

Premium:	$1.03	Expire OTM
MKC-bear call spread	Strike	Odds	Delta
Calls
Long	80.00	87.0%	15
Break-even	76.03	75.5%	27
Short	75.00	64.0%	39

The premium is 41.2% of the width of the position’s short/long spread. The profit zone covers a 5% move to the upside and an unlimited move to the downside.

The risk/reward ratio is 3.9:1, with maximum risk of $397 and maximum reward of $103 per contract.

How I chose the trade. The trade was placed to coincide with a general downtrend in the market. The chart metrics on MKC were entirely negative at the time of entry, and Zacks Investment Research earnings surprise predictor gave MKC a rank of 5 (strong sell). My goal is to sell either at 50% of potential profit or greater — $0.52 or more — or 21 days before expiration, on March 25, whichever comes first.

By Tim Bovee, Portland, Oregon, March 8, 2023

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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Based on a work at www.timbovee.com.