Latest Trade-- Sell Puts on 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.