Markets move in cycles, but math doesn’t change.
That’s why this trade keeps working through one of the choppiest markets in decades.
Back to Earth for Constellation Brands
Hey everybody, JD here with your Rational Trader Market Analysis daily.
Today I’m looking at a setup in Constellation Brands (STZ) — the big name behind Corona, Modelo, and a whole bunch of other alcohol brands you’ve probably seen on store shelves.
The company reports earnings after the bell, and the setup here is a classic Mean Reversion Cash Machine trade.
Mean Reversion in Plain English
When a stock stretches too far away from its “average” price — what traders call the mean — it often drifts back toward that average over time. That drift is mean reversion. It might seem like hocus pocus, but there’s nothing magical about it. It’s just how markets correct themselves once excitement or panic wears off.
Constellation spent weeks below its mean through late September. Then, over the last few sessions, it finally broke above that average. The stock isn’t suddenly a rocket ship — it’s just reverted to where it “should” be, and that pop higher often doesn’t last long, especially into earnings.
The Earnings Setup
Now we’re in the perfect spot for what I call a Mean Reversion Cash Machine trade — a structured, defined-risk play that takes advantage of a likely short-term fade back toward the mean.
Here’s how I’m structuring it:
- Buy the $140 put
- Sell the $136 put
- Both expire this Friday, October 10.
That’s a put debit spread, which simply means you’re buying one put and selling another at a lower strike to reduce your cost to enter the trade.
Just like when you buy a regular put, the trade profits if the stock drifts lower — , ideally back toward its mean — around a $4 move, or roughly a 3% pullback.
Why This Works
A lot of people overcomplicate earnings trades, trying to guess the numbers or read management tone. I don’t. I just look for stocks that have stretched too far in one direction heading into the event.
Constellation’s recent move higher puts it right in that category — and when I combine that with the broader slowdown in global alcohol sales, it adds a fundamental reason for a short-term pause. It doesn’t need to collapse, it just needs to cool off.
That’s the essence of mean reversion. Stocks get overheated, then gravity takes over.
Defined Risk, Measured Reward
This entire setup costs only what you pay for the spread — no surprises, no unlimited downside.
If the stock keeps climbing, you’re capped at your initial cost to enter the trade.
If it drifts lower by that modest 3%, you’re looking at a full profit.
In other words, it’s a math-based trade that doesn’t depend on guessing the future — just betting on how markets behave after they’ve overextended.
We’ll see how earnings shake out, but win or lose, this is the kind of setup I’ll take every time. Clean logic. Defined risk. Consistent edge.
That’s it for today — I’ll see you tomorrow.
Talk soon,
JD
The Rational Trader
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