Latest options trades: BKE, OLN & PLD
Some recent option trades include covered call options on a stock I’ve been long (and losing money) in since last April and a couple of new positions in some short cash secured put options. The covered call option position is designed to take advantage of the market’s extended run-up, while the short put positions are geared toward generating some additional potential income over the next six to eight months:
The Buckle [[BKE]] – On 01/07/10 I sold some June 22.5-strike put options against BKE as it pulled back somewhat after opening higher on better-than-expected same-store sales figures:
Trading at about $32 and yielding 2.5%, the shares of this specialty retailer of casual clothing for 12- to 24-year-olds are currently in a strong short-term uptrend and a neutral-to-positive intermediate-term trend. A break below the $27-$28 level would change this picture to something more negative.
BKE appears to be a reasonable value here based on its growth rate and estimated earnings going forward, with most current fair value calculations ranging from around $20 up to over $60. The company appears to be conservatively run with a good balance sheet and free cash flow, and has even paid out a sizable special dividend the last couple of years. While I’m wary of the company’s reliance on successfully staying in sync with fickle fashion trends, I’d feel comfortable owning the shares in the low $20s, which would be my cost basis if I’m ultimately put the stock.
Olin Corp. [[OLN]] – On 01/06/10 I sold some August 15-strike put options against OLN on a dip in the stock price:
Olin Corporation is a manufacturer of both chlor alkali products (which are used to make bleach, water purification and swimming pool chemicals, among other things) and Winchester-brand ammunition. Trading at about $18 and yielding 4.5%, the stock remains in an intermediate-term uptrend from its March ’09 lows, but has been trading mostly sideways since last August. A break below the $15 level would suggest a more clearly neutral to negative technical outlook.
In terms of valuation, OLN appears about fairly valued here. Earnings estimates for 2010 vary quite a bit, with resulting calculated fair values ranging from somewhere below $10 to over $20. I’d be comfortable initiating a position below $14-$15, which would be my cost basis if I’m ultimately put the stock.
Prologis [[PLD]] – On 12/24/09 I sold some January 2011 15-strike covered calls against my long position in this REIT:
Like another REIT that I’ve mentioned recently (Developers Diversified Realty (DDR)), this developer of global industrial distribution properties experienced a near-death experience during the financial crisis as a result of an over leveraged balance sheet. The subsequent forced deleveraging resulted in all-too-familiar share dilution and dividend cuts – and a much lower share price (and yield on cost basis for existing shareholders) going forward.
PLD may be a reasonable longer-term holding for buyers at these or lower levels, but at my cost basis ($26-$27) it represents a clear loser in my portfolio that is ripe for weeding out. However, rather than just sell it outright here, I elected to capture some significant option premium by selling at-the-money LEAPS calls against it to generate some income and provide some downside protection while giving the position some more time to play out (and to pay out some more dividends, reduced as they may be). If my shares of PLD are called, my effective sale price (including the option premium) will be about $18.
