One of the stocks I have mentioned previously on this blog is Pier 1 Imports (symbol PIR). The company is doing quite well with a good report last week. Even after that report, however, there is a high time value in the options which is there for the taking. My suggested trade is to put on a June 9 - 11 bull spread. that means buying the June 9 calls and selling the same number of June 11 calls. As of Friday's close, that spread was available for a cost of $1.50 with the stock price at $11.82 per share. What this means is that so long as the stock stays above $11.00 on the June expiration date (June 18th), one would get $2.00 back for the investment of $1.50. The annualized return on such an investment is 200%.
I like the bull spread on PIR because I do not think that the stock is likely to go up dramatically in the next two months. Indeed, it may even meander back down to $11.00 or so. In either case, however, the 200% return is plenty high enough. There is also the fact that the stock can go down by $0.82 or over 8% with no reduction in the return. Those are odds that I like. Of course, there is an increased risk if the stock really tanks. If you buy the stock itself at 11.82 and it goes down to $9.00, you still have three quarters of your money and the chance to get it all back if the price increases. With a bull spread, were the stock to go down to $9.00 on June 18th, you would lose your entire investment.
Disclosure: I am long the PIR stock and have option positions not including the spread recommended here.
No comments:
Post a Comment