The Developing Story of Crocs - You Have an Option

Like any other growth company that started life as a fad, Crocs has its share of detractors and supporters.  The detractors are sure that the company is still just a fad, based on the sales of their fad product, and the next quarter holds certain ruin, so "Sell, Sell, Sell!".  The supporters may wear the shoes, have read and understand the company's financial documents, and see tons of potential in all those Croslite-shod feet worldwide.

I've undeniably thrown in with the latter crowd, with both equity and several different OTM calls (Jun12 at $21, Jan13 at $35 and $45). I've been long Crocs since mid-2008 when the freefall was still in effect, and have been reading positive things from the quarterly & annual reports all the way back up from the depths. Matt Andrejczak has good points from the recent quarterly report in his article "Crocs should quit quarterly outlooks: Hodges Capital", and he soberly points up some of the reasons why the equity tanked immediately following the report.

Ideally, you know, people should just sit on an equity position, like CROX, through thick and thin while Mr. Market sorts out just when the reality of an increasingly valuable company should be priced per it's value.  But we're all impatient for the quick profit, which is why I'm sure options were created.  While the underlying equity goes up or down a couple of percent, the options can move much faster, netting a profit (or loss) for the cautious, wary options fisherperson.

But Rocco Pendola, writing at TheStreet.com, really sums up the option strategy (game) in the title of his article "You Can Lose It All With Apple Options".  If you're truly not equal to losing your entire investment very quickly--as Call holders found with both CROX and AAPL over the past week--then you need to re-evaluate your use of options.  If people are messaging you asking when the best time is to exit a position, then they're no better situated than Croesus, king of Lydia, when he got the prognostication from the Oracle of Delphi "If you cross the river, a great empire will be destroyed."

..TS.

$WGO Fell Off the $RIMM

[guest post by TS]

The only reason to include $RIMM and $WGO in the same blog title is to highlight their earnings woes reported Thursday. RIMM, the former champion of the smartphone, has been cored by both Apple and Google.  Winnebago, maker of big ticket RV's, is merely a victim of the economy.

Somebody is playing Winnebago in the options market.  Yesterday's (or just recent?) volume in $10 Jul 11 Calls was some 2000 contracts, and in the $7.50 Jul 11 puts some 1000.

My view on Winnebago is it represents the bottoming of the RV/manufactured housing market.  The recession did a Lehman on Fleetwood Industries, and WGO is feeling the heat (or cold?) through way depressed sales.  But, as jobs and housing creep back up, expect to see great things from WGO (at least from the current lows).  Check out Winnebago's balance sheet - quite healthy (though perhaps cashflow ain't what it was).

..TS.

How Are You Wearing $CROX?

Whether you wear $CROX shoes or think they're the antithesis of any fashion sense is immaterial - what matters is: do you think the secondary market for the stock has any future?  I do, and have since the Fall of '08, when $CROX was bottoming out.  I had read the 10Q's and 10K's and saw nothing but strength and common sense in the management of this company.  People around me echoed the "ugly shoe" and "going bankrupt" mutterings that the company inevitably attracted, but they had not read the SEC filings, they had not seen the evidence of a rabid customer base and an expansionist new management structure.

While the stock has been the place to be over the past 28 months, the real glory has shined in the near- and long-term call options.  I'm currently positioned in a vertical spread involving strike prices at $20, $30 and $35 for the Jan 2012 calls.  While the $20's are nicely in the money (I seldom buy ITM, but it's nice to do periodically), the $30 & $35 will only pay off if $CROX appreciates significantly, which is in no way guaranteed.

Clearly, I'm not concerned about loss, merely about maximizing upside.  Is this too risk-tolerant for your portfolio?

..TS.

[Note/Quote 6/16/2011:
"WJB Capital's chennel checks indicate the new Crocs Chameleons are selling "like hotcakes." The analyst said the biggest concern is that the company didn't realize just how big of a hit they and and didn't make enough of them. Shares are Buy rated with a $26 price target."  ..TS.]

BPI Event Arbitrage

[guest post by TS]

You read Monday about blogging colleague MM having jumped out of BPI, worried about the "political posturing" that is part & parcel with the whole for-profit college phenomena.  MM clearly used BPI as a learning tool, given all the posts, and we all have to get these lessons from the companies we research and buy/sell.

The problem (or beauty) with the market is that everything is event driven: one day, the gov't begins an investigation; the next, an analyst says the underlying is oversold. While my timeline is wildly skewed for demonstrative purposes, so is the share price of BPI.  How can you possibly move safely in these waters?

The answer:  you can't.  Just deal.  That said, you can follow the ups and downs as they occur with some degree of regularity and plan accordingly.  My thought experiment would be this: an investigation is still underway (shares down), but some analyst has said the magic word "oversold" (or perhaps "artificially depressed") (shares up).  If the investigation continues, then bad news could whipsaw BPI back down.  A perfect way to take advantage of a downswing would be put options.  I'm specifically looking at near term Aug 11 puts, at a strike price (below and out of the money) of $17.50.  Generally, one should stick with round numbers, but this looks well used (856 contracts in open interest) and the per contract price of $0.65 ($65 per) is just the amount I would want to spend.  [At the moment, bid is $.40 and ask is $.65, so while I may pay $.65, my position would be immediately revalued at $.40.]

Let's see how this trade goes.  If BPI spikes a couple more days, the per contract price could come down. When BPI tumbles (which its wont to do), this trade will be ready to appreciate.

..TS.

Parabolic Metals

When you begin to see words like "parabolic" used to describe the run-up of an investment, ya gotta begin looking at the other side of the mountain.  How do you play the upside? How do you play the inevitable downside? And, of course, when will the downside occur?

The scorching run in silver has been even more impressive than that of gold, but now some traders are betting on a sharp reversal by year's end.

The iShares Silver Trust (NYSEArca:SLV) hit another new high this morning, currently up 1.65 percent on the day to $44.85. The exchange-traded fund, which was below $18 in August, found support at $26 in late January.  [ Large trade bets silver will reverse course ]

 Now, if you thought the ups and downs of tech stocks caused butterflies in your stomach, that's nothing compared to the Sopwith Camels that put and call options can generate, but the options market is the place to play both upside and downside.  There's nothing like the certainty of the final stages of a bubble in which to hone your understanding of when to use calls and when to use puts:  my puts on ZSL are perfectly weird example--profiting from the downward pressure of an inverse ETF caused by the upward pressure of the underlying commodity.

One thing to note about options: people spend oodles of time trying to figure out the bid/ask spreads to identify best in/out times, etc., and to identify the value of an option, being overly mindful of both time decay and intrinsic value, if any.  My advice: forget all that.  Just be aware that you'll generally buy in at the ask and sell at the bid. As soon as you buy, your option will be priced at the bid price, versus what you think you bought it for--the price gyrations of that bid price is what you're watching, not your buy-to-open price.  Also, unless you have the support of your convictions and the market be damned (like my OOTM leaps on CROX), consider buying options that others have clearly bought (based on open interest)... that way you know others have also considered the possible outcomes of the trade in question.

..TS.