Staples has not been at the forefront of many analysts lately but we see a nice opportunity because of the way the stock appears to be moving and also with the slowly improving economy. Here is a nice options strategy we like to make money on the stock this year.
Staples, Inc., (SPLS) together with its subsidiaries, operates as an office products company. The company sells various office supplies and services, business machines and related products, computers and related products, and office furniture. It also provides high-speed, color and self-service copying, other printing services, faxing, and pack and ship services. As of January 29, 2011, the company operated a total of 2,281 superstores in 48 states and the District of Columbia in the United States, and 10 provinces and 2 territories in Canada.
When we look on a long term chart of Staples, we can see a well defined and familiar stock formation known as a cup formation. This formation is similar in appearance to Rounded Bottoms. Like rounded bottoms, the pattern includes an elongated U-shape. However, the pattern also includes a short period of consolidation of 1-2 weeks in duration, which tends to be down-trending. The pattern is similar in appearance to a coffee cup with a right-side handle, and indicates the potential for an uptrend
So we have signs of a possible turn around for Staples this year. This could give us a good foundation for an options play. Here are some factors to consider about Staples
Bullish Factors about Staples
- SPLS is the better managed company. The company has a track record of achieving strong returns on equity averaging 15.4%. This is much better than its competitors - Office Depot (ODP) and OfficeMax (OMX).
- It has generated almost twice the free cash flow of its competitors.
- With economic growth, SPLS is better positioned for increased market share than its competitors in North America.
- North American retail stores are its most profitable segment, with over 60% of sales centered in a mature US market and our economy is slowly turning positive.
The Option Play
Presently, while Staples is trading at 15.78, analysts believe that it can reach a median range of 18.00. With this in mind, we believe there is enough evidence to show the stock will move up this year. For this reason, we would like to suggest an option play for this year. A Bull Call Spread close to the money will give us a 100% ROI as Staples moves up. Here is the play:
- Buy September 2012 '16' call option (presently priced at $1.30)
- Sell September 2012 '17' call option (presently priced at $0.80_
- Net Debit to start: ($0.50)
- Maximum Profit: ($0.50)
- Breakeven: 16.50
The Reasoning behind the Trade
The economic conditions are becoming more favorable for companies like Staples to improve. Along with the bullish formation the charts are showing, the Relative Strength Index is showing increased strength as it pushes against the upper resistance yet again. When it pushes through, it does not have serious resistance again until it reaches 18 so it may steadily continue to inch its way up through 2012.