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Deep OTM NP Strategy – FEB Week 1

Posted by mounddweller on February 13, 2011

Fellow Traders,

Well, here we are just one week remaining until FEB expiration.  Before we get to the selection’s for this week I want to comment briefly on my favorite selection from last week.  You’ll recall my favorite last week was Tekelec (TKLC).  I liked it because it was cheap and had lots of cash on its balance sheet.  However, you’ll recall I cautioned that it was due to release earnings.  Well, earnings came out and they were not to the street’s liking.  The stock fell sharply, 28.7% to be exact.  It now is well below our $10 strike price, closing Friday at $8.55.  It is also now trading at less than book value.  Given it’s large cash hoard I don’t think it will remain below book value for long.  If it does someone is going to come along and buy it, lock, stock, and barrel.

If you sold the TKLC FEB $10 puts I would hold off doing anything until we get closer to expiration on Friday.  On Friday if it remains < $9 (book value is $8.96) I would roll the FEB $10 puts out to MAR.  If it bounces back above $9.50 I would accept assignment and sell the $10 calls on the following Monday.

Now, let’s look at the selections for this week.

Two stocks caught my eye this week, Sketchers (SKX) and La-Z-Boy (LXB).  They have a lot of similarities.  Both are retail stocks, one sells shoes and the other furniture.  Both are rated TA (i.e., “take action”) in VISIONS.  Both trade around 1.2 times book value.  Both have positive net cash.  SKX has over $4.50/share of net cash (over 20% of its market cap.)  And, unfortunately, both have earnings releases this week.  LZB reports Tuesday and SKX on Wednesday.

If I had to choose one over the other I think I’d go with SKX.  I like the one-year price chart on it a little better than LZB. 

One final comment.  If you didn’t sell puts on STEC last week, put them back on your list of potentials for this week.  Last week the $20 put looked nice, this week the $19 strike looks a little better.  It has a ROIC of 1.3% with 20.13% DSP.  However, remember it too reports earnings this week.  Anything is possible.

Best of luck in your trades this week.



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