Get YRCW

Companies that almost went under during the recession are not that rare. Some like Avis Budget Group (symbol CAR) have made incredible recoveries. (I bought CAR at 38 cent per share and sold at $11.00) CAR was as low as 15 cents per share and is now over $15.00. Other companies have recovered but not as well. Still another group continues to limp along, but many have bright prospects. One of this last group of companies is YRC Worldwide (symbol YRCW). YRCW is a trucking company whose debt and laobr agreements put it on the fast track to oblivion when the recession hit. Somehow, YRCW survived. It got concessions from labor. It refinanced its debt by converting nearly all of the debt into over 95% of the equity of the company. In its last earnings report it surprised on the up side with revenues and it appears that the company will survive and may even prosper.

What makes YRCW special is not its turnaround story; rather, it is the size of its option premiums. For example, as of this moment, with the stock selling at $3.74, the April 3.50 puts are at 68 cents. To me, this is extraordinary. YRCW has not been as low as the strike price since last July, and that was just for a few days. In other words, just a week or so after there being reasonably good earnings news, YRCW puts are selling at a price that indicates to me that the buyer believes the stock has a good chance of going into Chapter 11 bankruptcy before the option expiration date in April. Since there is unlikely to be anything before that date that could precipitate a crisis for YRCW, purchase of this put seems like a very poor bet to me. Indeed, I would sell them, not buy them.

Sale of the April 3.5 YRCW put pays an annualized return of almost 100% on the cash equivalent used for the put. In other words, if one assumes that writing the put requires that the full exercise price of $3.50 has to be put aside when the put is sold, the return on that amount from the option premium provides a return of just under 100%. Further, this trade results in a profit so long as YRCW stock is above $2.82 on option expiration date.

An alternative to just writing the put is to buy the stock and write a strangle: April 3.5 put and April 4 call. This would require investment of $2.58 per unit. If the stock is above $4 on April expiration, the profit would be $1.42 for an annualized return well in excess of 200%. So long as the stock was above $3.04 on April expiration, the trade would be profitable.

I do caution those who are not familiar with writing puts to do research on this type of trading before attempting to move forward with a transaction like the ones I outline. Selling puts is normally done in a margin account although some brokerages will let you do these trades in cash accounts so long as a 100% cash reserve is held for the margin position.

Disclosure: I have been in and out of YRCW many times in the last two years. Right now, I am short the April 3.5 puts as my only position in the security.