Author: Andrew Keene
Bank of Montreal (BMO) is a bank headquartered in Toronto Canada with primary operations in Canada and the United States. The company’s stock is currently trading around $57.80 in a 52 week range of $48.17-$74.25. The stock has been weak this year with shares falling by nearly 18.25% year to date. With the company looking to report earnings tomorrow morning before the bell it appears that the stock is primed to continue its downtrend after the number.
BMO has a historically weak track record on earnings day with shares falling 6 of the past 8 quarters with an average move of 1.3%. The stock has been in a rather tight consolidation pattern with shares failing to break out of the recently established trading range. The stock is above the Ichimoku Cloud but the future cloud is now sideways and does not have a clear upward slope. With stock at current levels options markets are implying a move of around $2.85 by December expiration. Using this implied move a trader can calculate implied targets for BMO on expiration. Given the weak historical movement and the consolidating chart in BMO it is difficult to justify anything but a short in BMO.
Using the stock’s current price level and the implied move I can calculate a downside target of $54.95. Since there are only $5 wide strikes in BMO I will have to setup a spread with a risk to reward ratio that is different than I would normally look for.
Potential Trade: Buying the BMO Dec 60-55 Put Spreads for $2.25
Risk: $225 per 1 lot
Reward: $275 per 1 lot
This trade profits if we trade to the measured move target and gives me a better than 1:1 reward to risk ratio.