Panera Bread Co. (symbol PNRA) is one of the most successful restaurant chains of the last fifteen years. During that time, it has gone from just over $3 per share to its current price of $97.70, a rise of over 3100%. The company's stock, however, has moved down and then sideways since the start of the year. In fact, just before the end of last year, I recommended buying puts when the price went over $105 and then I recommended closing out that position just after the start of 2011. The company is very strong and its prospects are quite good. The valuation is still rich in my opinion, however. So the question arises: how can one profit from this company given that it is not likely to soar in the next few months?
My answer is to use a bull spread. For example, Earlier today, I put on 10 of the August 70-90 calls in a bull spread. Specifically, I bought the August 70 calls for $29.10 and sold the August 90 calls for 12.90. So, I paid $16.20 for an investment which will pay me $20.00 in six and a half months so long as Panera is still above $90.00 at that time. This is an annualized return of just over 43%, quite a nice profit on an investment that seems quite safe. Indeed, Panera can decline by 8% from its current price without reducing my return at all.
The point of this post is not about the precise very small trade that I did in Panera. Rather, it is to point out that Panera stock can be used for these types of spreads. The risk can be cut by using lower strike prices or shorter durations. Of course, reducing the risk also reduces the return. Nevertheless, with a steady and stable company like Panera, one can get annualized returns of ten to fifteen percent with very low risk.
Disclosure: As I said above, I have bull spreads in Panera in place but have no plans for more at the present time. I have no interest in the underlying stock.
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