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| Featured Stock and Option Play |
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| How To Use The Featured Stock and Option Play: This section
is, of course, for educational purposes only. It is not a recommendation to buy
or sell any particular security. The entire purpose of this analysis is to provide
educational examples of possible ways to different option strategies.
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| Featured Stock: Gymboree Corp. |
| Monday, August 5, 2002 - 10:30AM |
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Company Profile: The Gymboree Corporation (Gymboree) is an international specialty
retailer operating stores selling apparel, accessories and play programs for children under
the Gymboree brand. The Company operates stores in selected suburban and urban locations.
Under the Gymboree brand name, the Company designs and contract manufactures children's
apparel and accessories for sale exclusively by Gymboree. As of July 6, 2002, Gymboree
operated 572 stores, including 522 stores in the United States, 23 stores in Canada and
27 in Europe, as well as an online store at gymboree.com. The company also offers directed
parent-child developmental play programs at more than 470 franchised and company-operated
centers in the United States and 21 other countries.
Short-Term Background: On Wednesday, July 31, 2002, children's clothing retailer
The Children's Place Retail Stores Inc. (symbol: PLCE) warned that its second-quarter
loss would be greater than expected as sales have slumped significantly over the past two
weeks. The news about PLCE's July same-store sales was bleak. "While we experienced some
improvement in business in early July, sales have significantly declined over the last two
weeks. As a result, we are left with more summer merchandise than we expected and are
taking additional markdowns to clear this inventory and avoid further distracting from
the presentation of our back-to-school floor set," said Ezra Dabah, Chairman and Chief
Executive Officer of The Children's Place. "Based on current sales trends, coupled with
lower back-to-school inventory levels, we are taking a more cautious outlook toward the
balance of the year, and now expect second half earnings to be equal to last year's
results. We are confident that the merchandise strategies we have been implementing will
maintain the company on a path of continued growth and profitability."
The Result: The warning immediately dropped the company's shares down 18 percent.
In the next couple of days following the news, Children's Place stock fell 25% from its pre-warning price, dragging
down the rest of the children's clothing sector with it. Gymboree shares also fell 25% and are
currently trading at the $11.50/share. The decline is shown in the graph below.
Contrarian Play: Gymboree Corp. is scheduled to announce July same-store sales on
Thursday, August 8, 2002. The same-store sales include the sales through Saturday,
August 3, 2002. The expectations for this report has been drastically lowered by the
Children's Place announcement. The lowered expectations and bleak outlook of Children's
Place provides a contrarian play for Gymboree Corp. We look for GYMB shares to
receive a positive bounce or rally on Thursday if the company's same store sales are
not as weak as those of PLCE. As an added benefit, for the weekend of Friday, August 2nd
through Saturday August 3rd, the three southern states of Georgia, North Carolina and
South Carolina independently sponsored a tax-free weekend where back-to-school items
and children's clothing could be purchased without paying state taxes. The buying surge
in these three states should help GYMB's same store sales report. Although the tax-free weekend
actually occurred in August, it is reported in the Gymboree July same store sales report for the period
that ends August 3rd.
Possible Covered Call Play
If you are bullish on Gymboree stock you could place a Buy/Write order to buy Gymboree
Corp. shares in blocks of 100 and sell the September 12.50 covered call (option symbol: GQUIV)
at a net debit of $10.75/share.
GYMB shares are currently trading at a price of $11.75/share. By selling the covered call,
you are reducing your cost basis to $10.75/share
and you are agreeing to sell the stock at $12.50/share at expiration if the stock price is
above this level. The expiration day for this option is Friday, September 20, 2002. The risk
in this position is that the stock will fall below your cost basis of $10.75 per share.
Market Scenario #1: If GYMB shares close above $12.50 on Friday, September 20, 2002,
your shares will be called away and you will receive $12.50 for each share of stock, a gain
of $1.75 /share, or a 16.28% return on the position using 100% cash. Aggressive investors
may decide to buy the stock on 50% margin which could double the return to 32.56% but also
increases the risk. Commissions expenses are not included in the above calculations but
should be $35 or less for buying up to 1,000 shares of stock plus selling 10 contracts.
Market Scenario #2: If the stock closes below $12.50 at expiration, you keep your
shares and can write another covered call on the position for the next month. By writing
a second covered call you will be lowering your cost basis once again. Since your cost
basis is $10.75/share, the stock could fall to this level from its current price you
would still break even on the position.
Market Risk: The risk in this position is that the stock could fall below your
cost basis of $10.75/share. If the stock does decline and you wish to exit the position
before expiration, at any time you can repurchase the calls that you sold and sell the underlying stock.
Possible Buying Call Play
Below is a short-term speculative option strategy that should profit if Gymboree shares
rally during the next couple of days and the position is closed. The prices we are using
are the current option prices at the time of writing and are meant as examples only.
Note: This is an aggressive options position and it is possible to lose 100% of the capital
invested in the trade. It should only be considered by aggressive option investors who have the
ability to continuously monitor the position and have the risk tolerance for the trade and
long option strategies.
If you are bullish on Gymboree during the short term, you could place a limit order to buy
the GYMB August 10 call (option symbol: GQUHB) for a price $2.00 ($200/contract). GYMB shares
are currently trading at a price of $11.75/share. This position is a short-term play only and
will need to be closed once profits are achieved or if the stock starts to rally. We would
set our stop loss for this position at the stock price of $10.50 and close this position
in two weeks or less if the expected move did not occur. To close the position, an investor
will need to sell the call contracts that he or she originally bought. The options expire
on Friday, August 16, 2002.
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