Options trades: BKE, UVV & GMR
I initiated two new naked put option positions this past week even as the market edged higher and volatility continued to come in. The new short put option positions are both in stocks that were taken to the woodshed on earnings disappointments – one a retailer and the other a tobacco wholesaler (see details below).
I also closed out a covered call option position on a tanker stock, including selling all of the shares of the underlying stock. This was all done at a decent profit as I move on to look for opportunities elsewhere.
Closed/Adjusted positions:
General Maritime [[GMR]] – On 8/4/10 I closed out my covered call option position in GMR – and sold the underlying shares – as a risk reduction move following weakness in the shares after the company announced a wider-than-expected Q2 loss and reduced its dividend. GMR may still be a reasonable longer-term play at these levels, but its continued underperformance compared to most other stocks in the sector is enough to have me looking elsewhere.
So I bought back the November 7.5-strike covered calls I sold against GMR last month (for a $0.65 profit) and sold my shares (at $5.80), for an 11-month net return – including two dividend payments and the sale of some previous covered calls that expired out-of-the-money (OTM) – of about 9%.
New positions:
Buckle Inc. [[BKE]] – On 8/5/10 I sold some March 22.5-strike put options against BKE for $2.70 as the stock sold off sharply after the company reported a larger-than-expected drop in revenue for July:
Buckle operates over 400 retail stores in 41 states in the U.S. offering quality casual apparel (especially branded and private-label denim), footwear and accessories aimed at 15 to 30-year-olds. Earnings risks include caution in spending among its customer base, changing fashion trends and intense competition, while positives include the company’s strong brand and balance sheet, as well a history of – and continued opportunity for – solid growth.
Currently trading at about $26 and yielding 3%, shares of BKE are clearly in a strong intermediate-term downtrend and showing “oversold” conditions on price oscillators – although not yet any obvious positive divergences. This, combined with possible further downside in the coming days/weeks toward support in the low $20s, could set the stage for a potential significant bottom of some sort.
Valuation-wise, current fair value estimates range from the mid to upper $20s to as high as about $60, with an average fair value estimate somewhere in the $30s. From a dividend perspective, the stock has a reasonable $0.80 annual payout, which the company has supplemented – rather than grown – in the last couple of years with substantial special dividends (e.g., $1.80 in 2009).
If the put options I sold on BKE expire OTM my return will be about 12% in 7-1/2 months, or 19% annualized. On the other hand, if I’m ultimately assigned the put options and end up being put the shares, my net cost basis will be $19.75 with a corresponding nominal dividend yield of 4%.
New positions:
Universal Corp. [[UVV]] – On 8/4/10 I sold some February 35-strike put options for $2.00 against UVV as the stock sold off after the company reported lower first-quarter earnings and issued cautious guidance:
The world’s largest leaf tobacco dealer, Universal Corp. selects, buys, processes, and ships leaf tobacco in the US and globally for sale to – or for the account of – makers of tobacco products. Risks include reduced demand for tobacco products, adverse changes in foreign exchange rates, disintermediation (from makers sourcing tobacco directly from farmers), increased leaf costs and the company’s relatively small capitalization; positives include increased operating efficiencies from restructuring efforts, reduced debt, share buyback potential and the industry’s relatively stable global demand.
Currently trading at almost $38 and yielding about 5%, shares of UVV have continued to drop sharply within the context of an intermediate-term decline that began in late April. The shares are technically “oversold,” however, and positive divergences on the price oscillators are suggesting the potential for some sort of bottom being formed in the coming days/weeks.
Fundamentally, current fair value estimates for UVV (of which only a few could be reasonably calculated) range from the upper $30s to over $80, with an average fair value estimate of around $50. Dividend-wise, UVV has a 39-year record of consecutive dividend increases – with the latest being last November – although they’ve only been at about a 2 to 2.5% pace in recent years.
If the put options I sold against UVV expire OTM my return will be about 5.6% in 6-1/2 months, or a little over 10% annualized. If I’m ultimately assigned the options and put the shares, my net cost basis will be about $33.10 with a corresponding dividend yield of about 5.7%.
