Michael Shulman

The Value of 99 Cents

by Michael Shulman   09/12/08

Rolling simply means pocketing your profit and re-allocating your original investment stake in a new position with either a different strike price or expiration date (or both) to get more leverage.

So, my subscribers bought the NDN March 7.50 Puts at my recommendation for 70 cents. Keep in mind, we were spending less per share than we would have spent on an item in one of these stores, and we were positioning ourselves to earn our money back (and then some!) with our short-side plays. And sure enough, in two months' time, our put options were worth $1.40 for an easy money-doubler.

But, I still wasn't done. I recommended rolling again into the June 5 Puts for 75 cents.

While it's typical to play the same name a couple of times over, I should have left the party sooner because value investors had come to join me, driving the stock price up.

(Value investors are those who look for broken stocks and buy them "on the cheap" in hopes they will be able to ride them back up to their former glory. But just because a stock is trading at bargain-basement prices, doesn't automatically mean it is a "bargain" -- remember, we're buying puts on broken stocks, while the value guys are "hoping" these busted stocks will make a quick turnaround.)

Many investors thought the retailers built a recession built into their prices and, since many have strong cash flow, they were viewed as cheap. And in the case of 99 Cents Only Stores, the stock "can" go up not because the company has a terrific business model, but an economic stimulus package looks to help the 99 Cents Only chain later in the year. And for us on the short side, it's better to take the money and run than to wait and see. So, on Feb. 1, it was time to close the position and move on.

Still, our 133% and 100% profits from our first two forays into the 99 Cents Only Stores more than overshadowed our loss in the last trade. To put it in further perspective, our mere $40 loss per contract, or 100 shares, was nothing compared with the loss that traditional shareholders felt in the first days of February.

Had we held 100 shares long, we would have been looking at nearly a $141 loss in a week's time. Ouch. Fortunately, our lesson about learning the value of 99 cents was much more profitable. Talk about appreciating the value of a dollar (store)!