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XMFConnor (97.30)

Latest Trade-- Sell Puts on RST

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November 08, 2011 – Comments (7) | RELATED TICKERS: RST

Trade: Sell (short) the March 16, 2012 $5 put option?
 
Things are bad at RST, but not as bad as everyone is making them out to be. After poor quarterly results and the CEO announcing he will step down, I think a lot of the distressed selling has been done. To further enhance my margin of safety, however,I sold far out of the money (farthest they offer) puts at $5, expiring in like 5 months. The company has $5.24 in cash and last traded at $7.04. With my trade filling at $0.45, this creates a breakeven price of $4.55, about 35% below current prices. Even in a worst case scenario where the company burns about $.20/share per quarter of cash/share, my breakeven price would be valuing the business at cash, giving the RST brand and operations for free. I think this is a steal. A turnaround may take awhile as previous mgt. has really screwed it up, but there is definitely upside in international expansion-- at cash is just too cheap! This low risk opportunity currently has a 9% return (greater than 18% annualized). This seems like a pretty nice risk/reward. This is confirmed by examining the historical volatility (41.86% over last 93 days) vs. implied vol. of 152%.

Bottom line:  RST is going through some growing pains, but this is not a company that should be valued at cash. The brand is too strong, the growth potential is still there, and selling the $5 March puts is a great way to create a skewed risk/reward.

I'd love any feedback people have on this trade and would love to discuss other trades as well.

Connor

7 Comments – Post Your Own

#1) On November 08, 2011 at 9:27 PM, TMFTypeoh (79.16) wrote:

I've sold OOTM puts on hated companies before, and they've come back to bite me.

 
You never know just how hated a stock could be, and as they saying goes "the market can remain irrational longer than you can remain solvent".

 Having said that, I would guess that your going to make money on this trade.  They've still got a healthy balance sheet, which should protect the downside from here.

 The rule of selling puts is this:  Are you ready, willing and able to buy shares should they get put to you?  As long as the answer is yes, your golden.

 I'm a suffering RST shareholder myself, so I truly hope these expire worthless for you. 

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#2) On November 09, 2011 at 10:38 AM, goldminingXpert (30.95) wrote:

RST as a company really really really stinks, as I have written ad nauseum. That said, it is hard to envision the stock trading too far under liquidation value which is well above $5. Your trade should work out fine. (Though why you'd still be long the stock, I can't possibly imagine.)

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#3) On November 10, 2011 at 10:32 AM, XMFConnor (97.30) wrote:

^ Not long the stock (at least yet).

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#4) On November 10, 2011 at 12:37 PM, goldminingXpert (30.95) wrote:

^was answering to both you and the commenter. I much prefer your option trade XMFConnor to owning the stock outright.

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#5) On November 10, 2011 at 4:14 PM, XMFConnor (97.30) wrote:

Gotcha,

What would you peg liqudiation value at btw?

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#6) On November 10, 2011 at 6:49 PM, goldminingXpert (30.95) wrote:

They've got a nice and clean balance sheet mostly made up of cash. Of course, in a liquidation scenario, the goodwill and intangibles get mostly written off, and inventory gets market down. But the cash is all good, the accounts receivables are likely fine (as long as more retailers don't go bankrupt like Borders), and the inventory can be sold at reduced prices. The brand name is still worth a lot, and since advertising seems to be increasing again, the brand shouldn't deteriorate much in value. 

I'm rambling now -- to answer your question, somewhere around $7-7.50. 

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#7) On November 10, 2011 at 6:49 PM, goldminingXpert (30.95) wrote:

per share

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