Frozen potato producer and distributor Lamb Weston Holdings (LW) is down over 50% in the past year. With food prices starting to fall on a year-over-year basis, one trader sees further downside ahead.
That’s based on the July $42.50 puts. With 122 days until expiration, 17,609 contracts traded compared to a prior open interest of 159, for a massive 111-fold rise in volume on the trade. The buyer of the puts paid $2.20 to make the bearish bet.
Lamb Weston shares recently traded for about $51.50, so shares would need to drop by about $9, or about 17.5%, for the option to move in-the-money. The strike price is well below the stock’s 52-week low, which the company just broke down to in the past week.
Operationally, Lamb Weston has been a poor performer, with revenues declining 8% over the past year. Shares are somewhat inexpensive at 13 times forward earnings, but the potato business is hardly a high-growth, high-margin, or wide-moat business.
Action to take: With shares in a decline, interested investors may want to wait on the sidelines for now. The decline in shares has pushed Lamb Weston’s dividend up to 3%, but may go higher yet on further market fears.
For traders, the July $42.50 puts are well positioned for a big move lower in shares in the coming months. Given the current price of the option, a further decline in shares could translate into a high double-digit return.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.
