The Money Tree

Safely Generating Income in Retirement

New CC Trade – GME

Posted by mounddweller on July 20, 2009

Can you believe it?  I actually executed a new CC trade today!  This is my first new CC trade since January!  You contrarians out there be sure to note todays date as I have probably just called the top of this bear market rally.  Knowing my luck lately, I will have gotten  into a new position about the time everyone else starts heading for the exits.

Oh well.  For what it’s worth here’s why I like this trade.  GME has been on my watchlist for quite some time.  Why?  Because they sell what everyone wants right now…cheap entertainment.  Of course Mr. Market doesn’t agree with me because he has pushed down the price of GME from a recent high of $32.82 in April to a low of $20.02 on July 13th.

For those of you who don’t have kids, you probably don’t know that GME is THE PLACE to buy/sell new and used video games.  I think as we get closer to the holiday season Mr. Market is going to wake up to the fact that while lots of people are reining in their spending, none of them are going to go so far as to put lumps of coal into their kids Christmas stockings this year.   Thus, I anticipate strong sales in the latter half of the year at GME.  This should result in a rebound in the price of GME stock.

OK.  Now let’s look at this trade using my Trading Plan evaluation criteria.  First the pluses.  GME has huge operating margins and generates enormous cash flow.  The shares are also cheap, selling at a single digit P/E of 9.2.  The minuses?  Well,  the one thing that sticks out for me is their lack of bare cash.  Long-term debt exceeds cash on the balance sheet.  However, in my mind, this is more than compensated for by the huge amounts of free cash flow.

GME - Trading Plan Criteria

Now let’s look at the chart.  You can see that this isn’t a picture perfect trade from a Groenke / VISIONS standpoint.  While the stock has been in the V for 23 days, has a Gold$ score of 80, and is well under the BL of $24.56 the trend has only recently reversed and started going back up.  Thus, I was conservative and executed an ITM covered call.  I wanted to hedge my bets just in case the stock should resume its decline.  For you more adventorous types out there I will point out that the ATM calls earlier today were yielding a very generous 6.2%.

VISIONS - GME Chart

OK, I’ve rambled on long enough.  Here are the specifics of my trade.  I basically did what Ron likes to call his “double up” strategy.  I first did a buy/write asking for a debit of $20.17 or better.    This translated into me being filled on GME at $22.27 and selling the AUG $21 calls at $2.11.  If called away at $21 in August my ROIC will be 3.77%.  After getting filled on my buy/write trade I also sold the AUG $20 naked puts for $0.55.  If the NPs expire OTM my ROIC will be 2.75%.

What do y’all think?  Do you like the trade?  Why or why not?

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