Stock Options To The Rescue! Ruby Tuesday (RT)

| April 12, 2012 | 0 Comments

RT Options

Today we’re going to look at Ruby Tuesday and how you can use options to reduce your cost basis and profit from the recent decline in the stock.

Here’s what happened…

Ruby Tuesday (RT) shares dropped more than 20% from $8.88 to around $6.85 per share after its quarterly revenue, earnings, and outlook fell short of Wall Street expectations.

Here’s the deal…

The casual dining restaurant company reported quarterly earnings of 7 cents per share.  Earnings were down from 25 cents per share last year and far short of the 16 cents they were expected to earn.

Their poor results were driven by same store sales falling by 5%.  And resulted in revenue of $324 million, falling short of the $339 they were expected to bring in.

Additionally, management also gave disappointing guidance for the rest of year.  They’re now expecting earnings to fall 8 to 13 cents short of the 56 cents they were expected to earn this year.

Here’s the kicker…

RT obviously had a bad quarter.  And there are some issues they need to fix.

The good news is they have a plan to get things back on track.  They’re closing 25 to 27 underperforming stores.  And they just acquired Lime Fresh Mexican Grill for $24 million.

Don’t throw in the towel and take a loss on RT… Instead, look at rescuing your trade with the help of options.

Here’s what to do now…

Let’s assume you bought 100 shares of RT at $9 right before earnings.  And you don’t mind doubling down on your position size (increasing it to 200 shares) because RT’s long-term outlook still has potential.

Selling the RT October $7.50 straddle is a great way to rescue this trade.

Right now you can sell the Oct $7.50 calls for $0.90 and you can sell the $7.50 puts for $1.70.  The trade results in a $260 credit.  It also sets aside $750 in your trading account to cover the purchase of 100 shares if the put option is exercised.

There are two possible ways for this trade to get you back to breakeven or even profit on this trade.

First, if RT is above the $7.50 strike on October 20th (options expiration day).

In this case, your call option will be exercised and the put option will expire worthless.  Your 100 shares of RT will be called away or sold at $7.50… a loss of $150 ($900 – $750) on the stock.  But don’t forget, you get to keep both option premiums of $260.

You’re out of the trade with a $110 profit or about a 12% gain.  Not too shabby after being down more than 20%.

The other scenario is RT is below the $7.50 strike on October options expiration day.

In this case, your put option is exercised and the call option expires worthless.  You’ll have 100 shares of RT ‘put’ to you.  In other words, you’ll be obligated to buy another 100 shares of RT for $7.50 apiece.  And you still keep the $260 in option premium.

The result is you’ll now own 200 shares of RT at an average cost of $6.95 per share (100 shares @ $9.00 + 100 shares at $7.50 – $260 in option premium).  And at a current price of $6.88 per share, you’re back to breakeven.

That’s a win-win scenario.

Good Investing,

Corey Williams

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Category: Stock Options To The Rescue!

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.