Wouldn’t it be nice to have a directional bias in a stock but not have to pay the tab if what you ordered didn’t turn out exactly as expected? “Dream on” you say? We say take a look at the menu of options available with verticals and specific attention paid to out of the money bear call or bull put spreads or their synthetic equivalents.
To illustrate this type of vertical with a bull put spread, one growth stock that’s still whetting bulls appetites and might be deserved of this type spread order, which in turn could be a way to initiate a potential collar entry, is restaurant operator and franchiser Buffalo Wild Wings (BWLD). The company reported a mixed, but an overall healthy menu of financial morsels back on April 24 as it beat profit views by two cents, matched sales estimates on spicy year-over-year revenue growth of nearly 38% and reaffirmed its FY12 EPS outlook of 20% to match Street forecasts.
Figure 1: Buffalo Wings (BWLD) Bull Vertical and Daily Chart
Technically speaking, shares of BWLD signaled a EW4 buy signal on April 25 immediately following a surprise last hour case of indigestion on April 24 when earnings were reported late in the session rather than after the closing bell. Subsequent action in BWLD has been range bound with the stock bouncing above and below the signal near 85 by only a few percentage points and finishing back near that level on Wednesday night.
Given 2012’s “Sell in May” adherence in the broader market, the action in BWLD is viewed with a slightly stronger bias despite its mostly lateral digestive work on the daily chart. However, given the still uncertain technical environment that’s hinged on last Friday’s rally attempt low, rather than give the benefit of the doubt to BWLD rallying to places it hasn’t been in the last month, the idea of profiting from where it hasn’t gone, seems a more approachable position.
Shown above and to illustrate is a 5x June 80 / 75 bull put spread for $0.80. With 22 calendar days remaining, through expiration the spread yields 19% compared to risk of $4.20. Admittedly, the max risk might sound a bit too spicy to stomach for some traders. But, if we remember what hasn’t been ordered since its EW4 signal and BWLD’s first full sit-down by investors following its earnings release; re-defining that risk to something much more palatable such as its expiration breakeven of $79.20 looks interestingly approachable.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.