Do Not Buy This Undervalued Retail Stock

| February 3, 2017 | 0 Comments

options tradeBut, by using the simple options trade detailed here, you can earn an easy 7% return in just three weeks. That’s more than most dividend investors get paid in an entire year! 

HIGH PROBABILITY 7% potential return in three weeks

BUY American Icon single-digit SEARS another 19% lower or get paid not to…

This option strategy has used the market FEAR FACTOR to profit on plays in left for dead U.S. Steel, GoPro, and Deutsche Bank.

Volatility is OPPORTUNITY… to sell Cash Secured Puts

Take advantage of “market fear” to buy stocks at a big discount or make money in less than a month on time decay.

Selling cash secured puts has the same risk profile as a covered call play. Think of it as a lower limit order on a stock you want to own, but if it never gets there you get to keep the option premium taken in. A win-win situation.

Compared to the broad market in general, up 17% in the last year, retail has had it rough, up only 4%. The XRT retail exchange traded fund has remained mostly positive for the last 52 weeks though sharply underperforming the rocket stock rally since November.


The retail wreck has crushed some well-known names that have struggled to transition to the online world.

Sears Holdings is down 50% and trades below double-digits per share. Closing dozens upon dozens of stores and selling off assets has not seemed to slow the stock slide.

Instead of trying to pick a price bottom with a limit order, selling a cash-secured put option can profit if the stock rises, stays steady or even falls if above breakeven at option expiration.


The option volatility at the 110% level makes the option expensive in relative value compared to the market itself. Option selling strategies take advantage of the increased premiums.

Interesting note that SHLD did not make new highs in volatility when the stock sold off this week. Bullish divergence is sometimes a sign of a bottom as sellers are less aggressive.

The potential return on risk of 7% is attractive with a $5.60 breakeven at the option expiration. The multi-year low in SHLD was printed Monday at $6.40.

Buying at a 19% discount if assigned is a way to position for a long-term recovery in close to a single digit stock…. Or to get paid not to buy it at these extremely low levels.

The high implied volatility makes option selling strategies attractive as pure probability trades that utilize time decay acceleration. The May options have three weeks until expiration.

This tactic to buy at a lower price, or get paid not to, is used by money managers to buy stocks they WANT for long-term portfolio positioning. Use others’ fears for your benefit by selling a CASH SECURED PUT to enter the stock at a major discount.

Option tactics can be employed to make money in Up, Down, and Sideways action to take advantage of other variables or time and volatility.

The fear and uncertainty can be used to get in another 10% lower for those who at worst are comfortable holding on to an inexpensive stock to wait for a potential recovery.

Portfolio Strategy

The straightforward Price Order to buy a stock at a lower level is common if it can be determined where it is comfortable to get in below current prices. Put in the trade at “X” and wait for the dip to enter.

Professional money managers have certain points at which they would buy a desirable stock but an option strategy lets them get in at discount or get paid not to.

Selling a CASH SECURED put, has the same mathematical risk profile as a covered call, would assign the stock long at the option strike price. The true entry basis is actually even lower with the subtraction of the premium.

With the Put sale there is an OBLIGATION to buy at the strike price if it is assigned.

However, if the stock is not below the strike at expiration the premium received is all profit. Get in the stock at a discount or get paid not to…

There are two rules that Cash Secured Puts traders need to follow to be successful.


Have the funds in the account to buy the stock at a discount if a selloff continues.

The intention is to be assigned the stock, each option represents 100 shares, as a long-term investment. Paying in full ensures that no additional money is needed to hold for potentially many, many months or even years until price recovery.

Rule Two: Sell either of the front two option expiration months to take advantage of time decay.

Collect premiums every month on put sales until assigned shares at a cost reduced basis. Every month that you keep the premium is money subtracted from the entry price.


Trade Setup: Sell the SHLD February $6.00 Puts to open at $0.40 or better. The cash secured Put sale would assign long shares at $5.40 if it is put to you costing $540 per option sold.

ONLY sell this put if you want to own the shares at a discount to the current price.

The combination of time decay and high probability of SHLD finishing above the $5.60 breakeven make the option sale attractive.

In fact, that $5.60 breakeven level is still another 12% below the annual low.

If assigned shares, a March covered call can be sold against the stock to lower the cost basis again when you own it.


If Sears stock does move lower, buy the shares for 19% cheaper than the current share price.

Otherwise, you get paid not to… and get a 7% return on risk in a month with near 75% probability of SHLD being above breakeven at expiration.

This strategy profits if SHLD stock rises, trades sideways or even falls as long as it remains above the $5.60 breakeven 19% below on the February 17th expiration date.

The next SHLD earnings announcement is February 23rd, after this option expiration.


Note: Alan’s colleague, Tim Plaehn, is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor for The Dividend Hunter and 30 Day Dividends.

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Category: Options Trading Strategy

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Alan Knuckman is a contributor to