🕒 Market Overview: Consumer staples face margin compression as commodity costs outpace pricing power

🔄 Sector Insight: Options market shows elevated put-call ratios across food companies exposed to input inflation

💰 Today's Trade Idea: Long put position on HRL targets continued downside from structural cost pressures

SMART TRADE IDEA

Long Put Option on HRL

Trade Setup:   Buy $25 Put, October 17, 2025 expiration

• Cost: Cost: $0.95 ($95 per option) or lower

• Max Profit: Unlimited

• Breakeven: $24.05 per share (or higher)

Management Plan: Consider selling the HRL $23 put option for the October 17, 2025, expiration at $0.95 or higher to create a vertical bear put spread at flat or a credit.

HRL shares reached a low of $23.71 after earnings on August 28. The next technical support level is at the April 2014 low of $22.45 per share, which is below the strike price of the $23 put option. HRL shares have been in a bearish trend since April 2022, increasing the odds of lower lows and potentially creating a bearish vertical put spread that could yield a maximum profit of $2 per share ($200 per spread) or higher by mid-October if the stock falls below the $23 level on October 17, 2025. 

NOTE: Remember, options trading involves substantial risk and is not suitable for all investors. Consider your investment objectives, financial resources, and experience level before implementing this or any options strategy.

DISCLOSURE: Trade recommendations may have changed since publication. Evaluate current market prices and risk/reward before acting. Trading involves significant risk and is not suitable for everyone. This is not personalized investment advice. Past performance doesn't guarantee future results. Publisher and contributors may hold positions in recommended securities. Readers assume full responsibility for their trading decisions. Consult a financial professional before investing.

MARKET BREAKDOWN

Macro Lens – Big Picture Market Forces

The market has fundamentally shifted its evaluation criteria. Revenue growth no longer impresses when margin management fails. Hormel's earnings disaster demonstrates how quickly commodity inflation can destroy profitability, even with top-line growth. Companies caught between rising input costs and consumer price resistance face extended margin compression that can persist for years.

The Federal Reserve's monetary policy decisions continue to influence commodity price volatility, while global supply chain disruptions create unpredictable cost spikes. This environment separates companies with sophisticated hedging strategies from those operating with rigid cost structures.

Sector and Stock Watch – Identifying Key Movers

Consumer staples and food processing companies face the greatest pressure from commodity inflation. Hormel's experience signals broader challenges across the sector, where companies struggle to pass through rising costs without losing market share. The options market reflects this reality with elevated implied volatility across similar names.

Technical analysis shows HRL breaking below key support levels, suggesting institutional selling pressure. The stock's decline from April 2022 highs represents more than a temporary earnings miss – it reflects structural challenges in managing commodity exposure.

Trading Strategy in Focus – How to Play the Market

The current environment creates opportunities for traders who can identify companies lacking pricing flexibility. Long put strategies target stocks exposed to commodity cost pressures without effective hedging mechanisms. This approach capitalizes on the market's new focus on operational discipline over revenue growth.

Traders should focus on companies with limited ability to pass through inflation, particularly those in competitive consumer markets where price increases risk market share loss.

Hormel Foods Corporation (HRL)has been in business for 134 years, dating back to 1891. The company develops, processes, and distributes a range of meat, nuts, and other food products to foodservice, convenience store, and commercial customers in the United States and internationally.

The latest earnings, released on August 28, 2025, were ugly. The market consensus had expected the company to report EPS of 41 cents per share and revenues of $2.98 billion.

While net sales rose 4.6% to $3.03 billion, EPS came in at only 35 cents, below the estimates and under the 37 cents level from last year.

The thirty-year monthly chart highlights HRL’s bearish price action since the record high of $55.11 per share in April 2022. As of August 28, the stock has more than halved in value at the $25 level. Tariffs could continue to weigh on HRL’s international business, and rising production costs due to inflationary pressures are increasing the company’s cost of goods sold. Moreover, higher consumer prices for HRL’s products do not bode well for future sales and earnings.

The stock’s trend is bearish, with long-term technical support at the $22.45 low from August 2014. HRL gapped down to a low of $23.71 on August 28 before recovering to the $25 level. The trend in any stock or market is always a trader’s or investor’s best friend, and it remains bearish in late August 2025.

The $25 HRL put option for October 17, 2025, expiration is trading below $1 per share. Buying the $25 put at $0.95 with the intention of selling the HRL $23 October 17, 2025 put option at the same price or higher, if the stock continues to make lower lows, could be optimal given the company’s earnings and prospects.

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