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DHH Options Time

Dark Horse Hedge is Rocking (2) & Options Time Again

By Scott at Sabrient and Ilene at Phil’s Stock World 

My heater’s broke and I’m so tired 
I need some fuel to build a fire (actually need something that cools heat down)
The girl next door (Tokyo), her lights are out, yeah
The landlord’s gone, I’m down and out
It’s cold gin (option) time again
You know it’ll always win – KISS

The tragic developments in Japan took center stage this past week and our hearts go out to everyone in Japan, and everyone who is touched by this catastrophic event.    

Prior to the earthquake and tsunami, the VIRTUAL Dark Horse Hedge virtual portfolio was positioned with a 70% Long / 30% Short tilt. We are now considering moving to a 50% / 50% balance. We will most likely do that, assuming no material change in the world events, by adding to our short positions next week.  In the meantime, we have two option positions which are expiring today and we wanted to add to the review we began last week.  (Click here for our first four long positions reviewed a week ago.)  

Options Expiration:

Radware Ltd (RDWR): On November 11, 2010 we added Radware (RDWR) to the virtual portfolio using Phil’s Buy/Write strategy.  At that time RDWR was trading at $33.39 and we added half the shares we wanted (100) and sold the March $35 2011 call and March $35 2011 put to complete the buy/write. On December 7, 2010 when the stock traded up to $40, we rolled the call out to the Jan $35 2012 call, which we sold for $9. We kept the March $35 2011 put we had already sold for $5.10.  The put (as 65-70% of options do) will expire worthless today yielding a $5.10 profit.  At this time, we believe it is prudent to hold the shares, currently trading at $35.56, and the Jan $35 2012 call.

Xyratex (XRTX): On December 20, 2010 we added Xyratex (XRTX) using the buy/write strategy and acquiring half the shares we wanted exposure to and selling March $15 calls and puts for a net $3.60.  XRTX is trading at $11.14 today on expiration day, so the call side will expire worthless ($1.80 profit) and the puts will be exercised – the other half position we were willing to own will be "put" to us at $15/share.  We still like XRTX going forward trading at a p/e just north of 2 and a forward p/e of 4.  For the time being, we will not recommend any options on XRTX. XRTX announces earnings on March 31, 2011.  

Review of Positions Continued

LONGS

Gamestop Corp. (GME) has been a favorite of ours since July 23, 2010.  In the case of GME, we are buying stock in a company with a 12% expected growth rate which is slowing down from a torrid 36% growth during the last 5 years.  GME is trading at a low p/e, only 8, in an industry that averages 15.  This theme of growth at a reasonable price (GARP) will come up again and again in the stocks we prefer to own in the virtual portfolio.  Since July 23, 2010 when we recommended the stock at $19.92 the underlying stock has only moved $.13 to close Friday at $20.05.  However, by using covered calls for September 2010 and January 2011, we have been able to reduce our cost basis to $16.76 while waiting for the stock to catch up to our expectations.  We are comfortable holding the stock (or buying it if we didn’t already own it). 

Jabil Circuit Inc. (JBL) was added to our list of Longs in January 2011 using the buy/write strategy.  The reasons we liked JBL are still the same.  Analysts are raising estimates for 2011 and 2012, it has a 12% expected growth rate, and it is trading at 9 times earnings. The stock was $20.56 when we added it in January and it closed Friday at $21.79.  DHH used the June 17, 2011 $21 call and put to bring in $4.30 in premiums.  (We are most often sellers of premiums in the virtual Dark Horse Hedge porfolio because 65-70% of options expire worthless and we are happy to be the recipient of those premiums.)

SHORTS

Green Mountain Coffee (GMCR) has a decent product in the coffee market but the company is currently the subject of an informal SEC investigation and many class action lawsuits.  There are enough rumors about this company to fill 10 pages. White collar criminal Sam Antar – former CFO of the infamous Crazy Eddie and top manipulator of money and people – continues to write articles about the problems he sees in GMCR’s accounting records. Go to Sam’s blog here for more detailed analyses.  GMCR trades at a pricey 116 times earnings and we don’t think it’s valuation is supported by its fundamentals and the risks associated with it.

We think there is significant downside potential for GMCR trading $60.85.

Warning: We have been getting our virtual head handed to us by shorting GMCR so far, and we hope GMCR is not the stock upon which we learn the lesson "the market can stay irrational a lot longer than you can stay solvent"!  


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  1. could you tell me where you post your DHH trades?  would like to follow
    Tx


  2. Hi Savi,
    All alerts should be available on PSW site.  Also post on Seeking Alpha under "Dark Horse Traders Hedge", Sabrient Blog and Small Cap Network.  Also happy to email alerts to anyone who wants them as soon as published.
    Best,
    Scott


  3. Hi Savi,
    I understand that Ilene is very busy and hasn’t had time to post the DHTH trades on PSW this week.  Since today is option expiration day I thought I would provide a link to where the post is.
    http://www.sabrient.com/blog/?p=4056
    Take care,
    Scott


  4. Hi PSW Members,
    Here is a link to the newest DHTH post.  Using a synthetic bull/call spread to get exposure to FCS.
    http://www.sabrient.com/blog/?p=4129
    Happy Easter,
    Scott