K-Swiss (KSWS) was featured prominently last week on Jim Cramer’s Mad Money and on the Motley Fool’s website. Cramer was bearish and the author of the Fool article, Selena Maranjian, was bullish. Who will prove to be right?
Audio Podcast:
An audio podcast of this article is available at: poweropt.com/podcasts/2007_01_15_KSWISS.mp3
Jim Cramer’s argument is K-Swiss is carrying heavier than usual inventory and has lower than usual future orders for its product. He feels this condition will ultimately lead to lower sales and quarterly earnings.
The nuts and bolts of his argument went something like this: Domestically advanced retailer orders were down 32% last quarter and the company’s inventory was up 21%. He went on to criticize the shoemaker for failing to cut prices to lower inventory. The thought may be if they embrace lower prices it will weaken the prestige of the brand.
Selena Maranjian writing for the Motley Fool in his January 3 article argues K-Swiss is a value because of its low 14 price to earnings ratio, a solid 21% earnings before interest, taxes, depreciation, and amortization, and an 18% return on assets.
K-Swiss may be a fine value for the long term. However, the numbers Jim Cramer is talking about will be reflected in the company’s earning report due out on February 5th; giving us solid reason to suspect a short term decline.
Jim Cramer’s pessimism may have already been priced in the stock; it dipped nearly 1 percent after his proclamation.
Let’s assume Jim Cramer is right and the stock is going to take a short-term downturn. How can we turn this into a profit using options? A good trade to consider is the bear-put debit spread. PowerOptions’ easy to use tools make it a snap to find a viable trade.
| Bear-Put Debit Spread — K-Swiss Inc. (KSWS) $ 30.18 (33 Days) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sell Opt |
Strike Info |
Bid Price |
Buy Option |
Strike Info |
Ask Price |
% Return |
Break Even |
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| SWUNF | 07 FEB $30 | $1.15 | SWUNG | 07 FEB $35 | $5.20 | 23.50% | $30.95 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
This trade is a bear put debit spread. This trade offers 23.5% potential profit in 33 days if the stock drops below $30.00. If the stock increases above the break-even price of $30.95, the investment begins to lose money. If the stock price goes above the higher strike price of $35.00, the entire investment is lost. The net cost of this trade, per 100 options, is $405.00.
Competitors:
Competitors for KSWS include: Nike Inc. (NKE), and Reebok International Ltd. (private).
Jim Cramer was also bullish on Nike (NKE) in his article. The prognosticator indicated inventories of Nike shoes were low while future orders were high. A potential option trade for the Nike stock found using the powerful PowerOptions search engine is the following:
| Bull-Call Debit Spread — Nike Inc. (NKE) $ 99.76 (33 Days) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sell Opt |
Strike Info |
Bid Price |
Buy Option |
Strike Info |
Ask Price |
% Return |
Break Even |
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| NKEBS | 07 FEB $95 | $5.70 | NKEBR | 07 FEB $90 | $10.40 | 6.40% | 94.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The Nike trade is a bull call debit spread. This trade offers 6.4% potential profit if the stock remains above $95.00. If the stock decreases below the break-even price of $94.70, the investment begins to lose money. If the stock price goes below the lower strike price of $90.00, the entire investment is lost. The net cost of this trade, per 100 options, is $470.00.
For more information about how to identify and research great option trades, visit the PowerOptions website. PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades and you will find the data you need to make quick, clear, and informed decisions. With PowerOptions tools, you can trade knowing you have found the best investment for your risk/reward profile. PowerOptions provides a toll-free number (1-877-992-7971) for customer support (PowerOptions’s customer support is second to none in the industry) for answering customer questions.
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[tags]Jim Cramer, Mad Money, Motley Fool, Selena Maranjian, Reebok International Ltd., KSWS, K-Swiss Inc., NKE, Nike Inc., covered call investment strategy, investment strategy, iron condor, poweroptions, stock option trading, stock options[/tags]