Ruby Tuesday: No Place Like the Short Side
by Michael Shulman 04/07/08
My ChangeWave Shorts subscribers and I recently donned our "Ruby" slippers to do some dancing in the streets in celebration of the short-side profits we were able to make from Ruby Tuesday's (RT) sliding share price.
In late 2007, the ChangeWave Alliance research revealed a coming recession in consumer spending, and restaurants were one of the biggest sectors taking a hit. Simply put, there were just too many casual dining spots and they are increasingly competing on specials, coupons and price. But which was the one that was going to get hit the hardest?
We zeroed in on Ruby Tuesday as an appetizing short-side play based on its faltering business and a chart that showed the stock was on the verge of imploding.
Shares were trading at $31 in February 2007, but since then, they embarked on a slow and steady decline -- straight into the single-digits. And with no signs of anything improving for the restaurant chain, we saw an incredible opportunity to make some serious short-side profits.
There are two keys to properly playing a stock to the downside -- first, you have to get in when "everyone else" is bullish. And second, you buy put options instead of outright shorting the stock. This strategy ensures that you get in while put premiums are relatively inexpensive and that you use a limited-risk strategy to position yourself for a potentially unlimited return.
On Oct. 25, we initiated what turned out to be a three-course meal of satisfying returns in Ruby Tuesday, via buying its January 15 Puts for $1.05 per share ($105 per contract). The stock was trading for $15.80 at the time, so we were betting on shares dropping through $15 before January options expiration rolled around.
by Michael Shulman 04/07/08
My ChangeWave Shorts subscribers and I recently donned our "Ruby" slippers to do some dancing in the streets in celebration of the short-side profits we were able to make from Ruby Tuesday's (RT) sliding share price.
In late 2007, the ChangeWave Alliance research revealed a coming recession in consumer spending, and restaurants were one of the biggest sectors taking a hit. Simply put, there were just too many casual dining spots and they are increasingly competing on specials, coupons and price. But which was the one that was going to get hit the hardest?
We zeroed in on Ruby Tuesday as an appetizing short-side play based on its faltering business and a chart that showed the stock was on the verge of imploding.
Shares were trading at $31 in February 2007, but since then, they embarked on a slow and steady decline -- straight into the single-digits. And with no signs of anything improving for the restaurant chain, we saw an incredible opportunity to make some serious short-side profits.
There are two keys to properly playing a stock to the downside -- first, you have to get in when "everyone else" is bullish. And second, you buy put options instead of outright shorting the stock. This strategy ensures that you get in while put premiums are relatively inexpensive and that you use a limited-risk strategy to position yourself for a potentially unlimited return.
On Oct. 25, we initiated what turned out to be a three-course meal of satisfying returns in Ruby Tuesday, via buying its January 15 Puts for $1.05 per share ($105 per contract). The stock was trading for $15.80 at the time, so we were betting on shares dropping through $15 before January options expiration rolled around.
If you've been waiting for an engraved invitation to play the short side of the market with puts, I suggest showing up to the party anyway because there is plenty of room -- and profits -- for everyone.
When I think of Martha Stewart, I think of big-time dollar signs on the short-side of that stock.
Write Puts to Get Long a Stock
Learn how being 'assigned' to buy stock can be a reward for employing a smart strategy.
Going long, buying puts, selling shorts -- all of these can be confusing at first. But there's hope!
What are the five rules for constructing great short-side positions? Read on to find out.
