NutriSystem Inc. (Symbol NTRI) is probably best known for their annoying television commercials touting the weight loss meal programs sold by the company. The essence of the company is that it sells meals that one eats as part of a long term weight control program. In a few weeks, NutriSystem will report earnings, but the estimates are for 2010 earnings of $1.14 and 2011 earnings of $1.32. The stock closed today at $19.95 meaning that the price earnings ratio based upon current estimates is just over 15.
What attract me to NutriSystem, however, are not the fundamentals of the company. These are fine, but with earnings still to come there is always the possibility that they could change. Rather, I like the option premiums that are available. For example, were one to buy NTRI at $19.95, one could write the March 19 puts for 75 cents and the March 20 calls for 95 cents. That means taking in $1.70 in premiums for options that are out of the money. If the stock is higher than 20 as of the March expiration, the annualized return will be over 100%. The breakeven point for this trade is $18.63 which is almost 7% below the current price.
Since NutriSystems’ business is not mysterious in any way, the most likely result when earnings are announced is for the stock to continue without a big movement either up or down. If that happens, the short term return will be extremely high. In addition, the stock will go ex-dividend for 17.5 cents before the March expiration, so there could be a nice addition to the earnings from these trades.
Finally, let me add my usual warning. These are not low risk trades. One needs to be careful not to put too much into them. In small doses, however, trades like this can give a nice boost to your portfolio. Before you invest, however, you should do your own due diligence.
Disclosure: I am long NTRI and have written options on the position.
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