Call Options Or Put Options On Barnes & Noble (BKS)?

| June 25, 2014 | 0 Comments

BKS OptionsBarnes & Noble (BKS) is the last major physical bookstore chain still standing. The book-selling business has been decimated by online sales, most notably from (AMZN).

BKS shares are currently trading at $21.86. The stock’s down just 2% from the 52-week high of $22.41 and is 74% above the 52-week low of $12.59.

Is this an opportunity to buy call options on BKS because the company is spinning off its tablet division? Or should you buy put options on BKS because retail bookstores are soon going to become extinct?

The bulls make a convincing argument…

Despite the tough environment for physical book sellers, BKS is up over 40% on the year. The book-selling part of the business is still profitable. The money loser has been the company’s investment in Nook tablets.

That’s why the shares are spiking today on news of a breakup of the business. The retail stores will be separated from the Nook business into two separate companies. This move should help unlock value in both units.

Not only will this move divide up the profitable and non profitable businesses, but it will make it easier for either business to be acquired. An acquisition will certainly boost the price of either company.

But the bears have a compelling case as well…

First off, the Nook business has been terrible. Making hardware is expensive, and margins on e-book sales are very thin. Separating out the tablet business won’t make it any more profitable.

As for the physical bookstores, it’s very hard to compete with companies like Amazon. It’s not just e-books, it’s also almost always cheaper to buy a physical book online.

At most, a spinoff of the tablet business will give a temporary reprieve to the company. Over the long haul, BKS is in trouble.

So is it time to be bullish on BKS because of its Nook spinoff, or should you take a bearish position because physical bookstores are in trouble?

If you think the bulls are right, take a look at buying the BKS August $21 calls for around $1.50.

If you think the bears are right, take a look at buying the BKS August $21 puts for around $1.25.

Yours in Profit,

Gordon Lewis

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Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.