There Are Many Ways to Exit The Children's Place

A Real Money Pro subscriber got in touch with me recently requesting some advice on how to deal with his positions in Children's Place , which is already a big winner. I've owned and written favorably about PLCE many times over the past few years. 2020 was an especially volatile period for the firm due to COVID-related, government-imposed, retail shutdowns. PLCE plunged from a February 2020 peak of $72.50 to a momentary nadir under $10 at March's panic low. By June 8, PLCE had rallied back to nearly $59. Amazingly, even as retail outlets reopened, PLCE gave traders one last incredibly great entry point in August when dreadful end-of-July quarterly results were reported. That month's low turned out to be $17.78. I backed up the truck and bought lots more shares under $20 while also speculating in the company's future rebound by buying some Jan. 22, 2022 expiration date $10 strike price call options at $13 per share. In retrospect, I wish I'd bought many more calls than I did. As of Dec. 22, 2020 PLCE was $48. As of Feb. 10, 2021 it had shot up to north of $78. Intrinsic value on those Jan. 2022 $10 calls is now $68.60 with greater than 11 full months until expiration. Others who bought those calls along with me should probably just sit tight with them as I see much further upside by next January. Those wishing to cash out can lock up about 427% gains right now by simply selling to close. A more nuanced strategy would be turning those long-dated calls into a bull-call spread. Bull call spreads involve shorting higher priced calls against the lower priced ones you already own. The technique is similar to covered call writing on actual shares. Expiration dates can be any period up to, but not longer than, the expiration date of the calls you own. Any strike price you sell would be risk-less as you could always exercise your long calls to cover the shorted ones, if necessary. The graphic below details actual pricing on PLCE's Jan. 21, 2022 calls ranging from $90 to $135 strikes, when PLCE was at $78.00. Things have gone so well already that selling any strike price below $120 would recoup more than 100% of the original $13 premium paid. You'd the be playing with house money and still have the chance to sell for the difference between $10 and the call price selected if PLCE reaches that level by Jan. 22, 2022. Those calls will attain long-term tax status well before their expiration day. That makes them eligible for favorable tax treatment when they are finally sold if held for at least a year and a day. Last November I revisited PLCE here on Real Money Pro with the shares at $39.11. I thought then that it could easily reach $83.50 within 12 to 18 months. With that goal in mind I suggested in late December that readers set up very conservative Jan. 21, 2022 $50 strike price buy/write combinations. The image below showed actual pricing for the shares and options with PLCE at $48 on Dec. 22, 2020. Here were the possible best and worst-case scenarios if those trades were held to expiration. Any close of $50 or better on Jan. 21, 2022 would deliver the best-case result, a stunning 165.9% gain. PLCE is now well above the $50 mark making that result appear quite likely. The subscriber's question was how to best handle the trade between now and next January. There are many ways to go. Do nothing. Simply leave everything in place and hope the shares remain at least $50 on expiration day. Buy to close (BTC) the $50 calls (at a loss) and resell new higher-strike price calls to try to capture an even larger gain by next year, or even later. Buy to close the $50 calls (at a loss) and sell the stock for a big short-term gain. I recommended that the BTC those calls while selling replacement calls out to Jan. 20, 2023 at a much higher strike price, such as $100. Here was my reasoning. The $50 calls would cost about $36.20 per share to close versus the $13.30 collected at trade inception. Closing the now deep-in-the-money calls generates a large tax write off ($22.90 per share) for tax year 2021. That saves money as if can offset realized gains from other trades. Selling new covered calls for Jan. 2023 at $100 would bring in about $26.50 per share. The net debit on that call spread roll out (and up) was thus just $9.70 per share. That less than $10 new outlay made it possible to see an extra $50 in upside if PLCE reaches $100 or higher by the now extended expiration date. I'd say that's a very likely outcome. Spending $960 per 100-shares now could end up paying him an extra $5000 per 100-shares at expiration, plus any dividends collected along the way. The tax savings garnered via closing the losing side of the trade early would have been worth $614 in tax savings using a 28% marginal tax rate, plus any additional savings at the state level. That alone almost covered the expense involved in buying to close. Also, if the much larger gain on the sale of PLCE shares is now realized in January 2023, it will be 100% long-term at a much more favorable tax rate. In addition that gain would not be reportable until filing a tax return for 2023, in April of 2024. Get a tax break now against your highest bracket rate while deferring gains for an extra two years and paying at a lower tax rate. How cool is that? One last thing. Even with PLCE trending around $78 its Jan. 20, 2023 put options were paying juicy premiums for sellers. $50 strike price puts were fetching about $16. $60 puts were paying $21.60 and $70 puts were bringing in $27.50. Worst-case, forced purchase prices would drop to either $34, $38.40 or $42.50 respectively. If you believe PLCE is headed higher owning it at any of those break-even prices should be fine. Selling options gives you plenty of options if you understand the game and use it, in perfectly legal ways, to your own advantage.

There Are Many Ways to Exit The Children's Place

Here's an example of how ending existing positions is an art, not a science.

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