Good morning and Happy New Year!
See this morning's Report for notes on building our new portfolios for 2018. This is our first official trade:
CMG/Streth - It's tricky as sales are up 10% from 2016 but profits ($187M) not even half of what they were in 2015 ($475M) and they are getting, at $292, $8.2Bn for the company so at POTENTIAL profit, it's a very reasonable 17 p/e but, at actual profit, it's a ridiculous 44 that you could never justify for a full-grown chain. How long will it take them to get back to $475M in profit but, even if they do, that really only justifies $300 so I would not be aggressive with them at all, but that's not to say I wouldn't play. You can:
- Sell 5 CMG 2020 $270 puts for $35 ($17,500)
- Buy 10 CMG 2020 $280 calls for $65 ($65,000)
- Sell 10 CMG 2020 $310 calls for $51 ($51,000)
That's a net credit of $3,500 on the $30,000 spread so 10x return on cash and TOS says $12,400 in margin - so nice and efficient. Also, since I don't expect them to make any rapid recovery, we can sell 4 March $310 calls for $12 ($4,800) and, if we can collect $4,800 a quarter selling calls, that's another $38,400 while we wait to see if we clear $33,500 on the main spread.
Let's make that the first official trade for the new LTP!
What's great about this trade is that, even if CMG goes lower, we can recover our money just through the quarterly short call sales. Makes it hard to lose!
