Put Option Profits in Martha Stewart
by Michael Shulman 03/27/08
There are many reasons to bet on a stock going down, whether you directly short the stock or instead buy put options as a lower-risk way to capitalize on a stock's downside.
If you wouldn't be caught dead owning the shares, that should be a pretty good indicator that the stock instead belongs in your short-side portfolio. But how do you go about picking the potentially biggest losers?
Like the saying goes, "It's what's inside that counts." And if a company, stock or sector is ugly on the inside, it's only a matter of time before the ugliness -- in the form of broken business models, less-than-spectacular corporate leadership, companies that are losing their competitive edge, and other conditions that signal their crumbling fundamentals -- shows on the outside.
Stocks go down all the time. And there's nothing wrong with turning their loss into YOUR gain.
Speaking of companies that make short-side investors smile, Martha Stewart Omnimedia (MSO) is a great example of how much money there is to be made when the company itself isn't making any.
Omnimedia recently came across my short-side radar as a two-pronged recession play -- as it has been impacted by both the housing depression and the pullback in consumer spending.
Several months ago, ChangeWave Alliance surveys started revealing that the bloom was coming off the consumer rose -- even among the well-heeled folks we survey -- and that spending growth was slowing.
When you're looking to get situated on the short side, you want to get into the names that are about to take a serious turn for the worst. And in late September, Martha Stewart's empire caught my eye as a potential casualty due to a perfect storm of events that was going to kneecap its share prices.
And I'll admit, I love saying it -- I was right!
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!
All stayed quiet on the short front through early January, when on Jan. 3, our puts had doubled in value, from $1.60 to $3.30, giving us a nice 106.25% gain. Not bad, but the stock was at $9 and dropping quickly, so while it was prudent to preserve some profits, there were many more to be captured.
So, it was time to roll the position -- that is, to take profits in the original Jan 12.50 Puts and use the original investment dollars to buy a new position with a later expiration date and a lower strike price. And the MSO June 10 Puts, which were trading at $1.85, looked like the way to ride the short-side express to even-bigger profits.
Long story "short," the overall market mayhem that came with the dawning of the new year -- plus an abysmal lack of holiday sales for MSO and many other retailers -- made the position work in our favor very quickly.
In fact, on Jan. 16, it was time to take the money -- $4.40, to be exact, which was a 137% gain! -- and run!
Consumers might not have been spending much at their favorite retail establishments this past holiday season, but those of us who did our shopping in the options markets by buying puts on these retailers enjoyed some very merry profits indeed!
by Michael Shulman 03/27/08
If you wouldn't be caught dead owning the shares, that should be a pretty good indicator that the stock instead belongs in your short-side portfolio. But how do you go about picking the potentially biggest losers?
Like the saying goes, "It's what's inside that counts." And if a company, stock or sector is ugly on the inside, it's only a matter of time before the ugliness -- in the form of broken business models, less-than-spectacular corporate leadership, companies that are losing their competitive edge, and other conditions that signal their crumbling fundamentals -- shows on the outside.
Stocks go down all the time. And there's nothing wrong with turning their loss into YOUR gain.
Speaking of companies that make short-side investors smile, Martha Stewart Omnimedia (MSO) is a great example of how much money there is to be made when the company itself isn't making any.
Omnimedia recently came across my short-side radar as a two-pronged recession play -- as it has been impacted by both the housing depression and the pullback in consumer spending.
Several months ago, ChangeWave Alliance surveys started revealing that the bloom was coming off the consumer rose -- even among the well-heeled folks we survey -- and that spending growth was slowing.
When you're looking to get situated on the short side, you want to get into the names that are about to take a serious turn for the worst. And in late September, Martha Stewart's empire caught my eye as a potential casualty due to a perfect storm of events that was going to kneecap its share prices.
And I'll admit, I love saying it -- I was right!
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!
All stayed quiet on the short front through early January, when on Jan. 3, our puts had doubled in value, from $1.60 to $3.30, giving us a nice 106.25% gain. Not bad, but the stock was at $9 and dropping quickly, so while it was prudent to preserve some profits, there were many more to be captured.
So, it was time to roll the position -- that is, to take profits in the original Jan 12.50 Puts and use the original investment dollars to buy a new position with a later expiration date and a lower strike price. And the MSO June 10 Puts, which were trading at $1.85, looked like the way to ride the short-side express to even-bigger profits.
Long story "short," the overall market mayhem that came with the dawning of the new year -- plus an abysmal lack of holiday sales for MSO and many other retailers -- made the position work in our favor very quickly.
In fact, on Jan. 16, it was time to take the money -- $4.40, to be exact, which was a 137% gain! -- and run!
Consumers might not have been spending much at their favorite retail establishments this past holiday season, but those of us who did our shopping in the options markets by buying puts on these retailers enjoyed some very merry profits indeed!
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