Looking to Survive Tuesday's Bloodbath, I Had My Options

Here are two real money trades I placed on the very nasty day that unfolded on Tuesday. I thought it would be instructive to explain these in detail, as they represent two separate types of actions that were both made possible due to the extremely scary market drop. The sale of naked puts always means taking a bullish stance on the underlying shares. Choosing appropriate expiration dates and strike prices should reflect your views on where that stock should end up over the time frame used. Caleres reported its best quarter ever in its fiscal Q3 (ended Oct. 31, 2021). The firm beat analyst expectations by almost 40%. Better still, management raised guidance for the full year 2021 to a range of $3.80 - $3.90. That is the best EPS by far in the company's long history. CAL ran to as high as $29.36 on the heels on that report. Caleres previously topped out north of $41 during August of 2018, when final EPS were on track to hit $2.21, the all-time record prior to this year. Seeing the shares pull back to under $24 was a gift not to be refused. I was a big buyer of shares on Nov. 30, as well as a seller of naked puts out to Dec. 16, 2022, about 12.5-months away. This particular trade shorted 4 put contracts using a $30 strike price paying $9.86 per share. The worst-case, forced purchase price dropped to just $20.14, offering an additional 14.7% margin of safety from an already bargain price. Why would anybody be worried about potentially being put shares of a booming company at around 5.3-times its current earnings per share? Maximum profit on these four puts came to $3,944 on a zero-net cash outlay if executed in a margin account with enough excess free buying power to secure the puts. In my world, almost $4,000 can go a long way in covering bills. I see the most likely result on expiration day will be that best-case profit. That's because I feel CAL's true value is already in the $40 - $55 range. Next Trade? Child's Play What about the other trade, a roll-out and up transaction on Children's Place ? Like Caleres, PLCE posted a huge earnings beat vs. analyst estimates and guided much higher for the full fiscal year ending Jan. 31, 2022. New projections for fiscal 2021 now run $13.20 -- that's tons better than any previous year in the company's history. Noteworthy, too, was that all major metrics exceeded PLCE's pre-pandemic year (in fiscal 2019). Another possible catalyst is that PLCE still sports a 17.35% short interest. Those silly enough to have shorted these shares a year ago have been burnt to a crisp as the stock more than doubled. It is still dirt cheap, though, at just 6.7-times this year's estimate vs. a normalized 16-times multiple. I expect PLCE to rocket much higher over the next year or two. Covering four old Jan. 21, 2022 expiration $80 puts for a big gain freed up buying power to rest the strike price and expiration date far into the future. I chose to extend out to Jan. 19, 2024 while upping the strike price 25%, to $100. Here is what the roll-ups' cash flow looked like at Nov. 30, 2021's prices. Selling two years of time at a $20 higher strike price brought in $12,880 more than it cost to close out the old Jan. 2022 expiration $80 puts. That is $32.20 per share in extra cash inflow right now. Subtract out the $20 higher strike price and you have actually decreased absolute risk while allowing for a much larger potential gain. The old commitment was to buy at $80 less the original put premium received. The new commitment is to own 400 shares of PLCE at a net cost of just $61.16 ($100 strike price less the new $38.84 put premium). If Children's Place rebounds to a more typical valuation it could easily surpass its old 2018 high of $161.60, set after reporting EPS of $7.91, not $13.20. I would still be happy to be forced to buy PLCE at less than 4.7-times its fiscal 2021 expected EPS. Rolling up and out let me position for a much larger dollar gain, without doubling down on the originally committed for, quantity of shares. Option trading is an art that can be learned by anyone. Possibilities are endless for sellers of covered calls and naked puts. In most cases you can get paid for changing your mind later, in either direction. You've now had a peek into my mindset when dealing with two different types of option trades.

Looking to Survive Tuesday's Bloodbath, I Had My Options

Let's see two trades I made during market mayhem, one in Caleres and the other in Children's Place.

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