Michael Shulman

Profits in Martha Stewart

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Given that the consumer drives up to 70% of the economy, and also given that our Alliance survey data told us that consumers across various income brackets were going to tone down their spending going into 2008, I saw Omnimedia as a perfect target, as it was barely profitable when consumer spending was more on-track.

Even better for us, it is also a poorly managed company, which meant that even if the company recognized its flaws, it couldn't execute a turnaround in its business model within a reasonable time frame -- if at all.

Throw in some lackluster holiday sales and a bleak outlook (because, if it doesn't make its money around the holidays, then when will it?), and your feeling of pity for this company is the only thing that will keep you from enjoying really outsized profits!

Back on Sept. 27, we set the table for an elegant serving of short-side profits, via establishing a position in Martha's empire via the MSO Jan 12.50 Puts for $1.70 or cheaper.

This was a bet that shares of the company would drop below $12.50 and, preferably, continue dropping. That's how you make money with put options -- they are a low-risk way to reap a potentially unlimited reward if the stock falls farther and farther.

We were able to get in for $1.60 a share ($160 per put option contract), and I picked the January expiration date so that we could see how the holidays panned out -- or, more accurately, did NOT pan out, for MSO.

We had a few challenging times when the market popped in early October, which rattled our positions in MSO as well as in a few other potential-recession/soft holiday spending plays. But even though I frequently re-evaluate our short-side positions to ensure that we're in the right place at the right time, all my research assured me that the position would turn back into our favor.

And in mid-October, the company announced a revenue increase for the first half of the year, which sent the value investors piling into the stock temporarily, thinking they were going to get a good bargain. In the meantime, I decided that it was worth riding out the volatility in the position because the good news for MSO had just about dried up.

Sure enough, in November, the company announced third-quarter results that included a $5 million loss. Ouch!