Guess? Offers Best-Returning Protected Covered Call With Upcoming Dividend

Mar.20.12 | About: Guess? Inc. (GES)

A protected covered call or collar search performed using PowerOptions tools seeking to find the highest returning dividend paying position with a maximum potential loss of 8% for a company in an upward trend and paying a dividend prior to option expiration produced Guess? (NYSE:GES) as shown below:

Click to enlarge.

Click to enlargeThe position found for Guess? has a potential return of 1.9% (19.3% annualized) and a maximum potential loss of 7.7%, excluding consideration for the upcoming dividend payment. The % If Unchanged return represents the amount of return the position will realized if the price of the stock is unchanged at option expiration. Including the upcoming dividend payment, the potential return is 2.5% (25.3% annualized) with a maximum potential loss of 7.1%, even if the price of the stock goes to zero. A protected covered call position may be entered by selling a call option against a stock and using some of the proceeds to purchase a protective put option. The specific call option to sell is the 2012 Apr 32 @ $1.35 and the put option to purchase is the 2012 Apr 29 at $0.30. A profit/loss graph for one contract of the position, including the dividend payment, is shown below:

The 8% maximum potential loss parameter was selected, as an investment experiencing an 8% loss or less can typically be recovered without too much difficulty using income generating investing strategies. Finding a position in an upward trend was performed by selecting to find a stock price with a 50 day moving average greater than the 200 day moving average. To find an upcoming dividend position, the search was performed using a search parameter for greater than 2% dividend yield and for an ex-dividend date occurring prior to the respective stock option expiration.

Guess? recently announced it is paying a dividend of $0.20 payable on April 13, 2012 to shareholders of record at the close of business on March 28, 2012.

Guess? released its previous quarter's earnings results on March 14, 2012 and the results were OK, but the company didn't perform very well in Europe, which is not a surprise with all of the sovereign debt turmoil occurring in Europe. In it's Q4 2011 earnings call, the company indicated they are seeing an improvement in the U.S. economy, but the European economy is a big question mark. Contrary to some pundits, the company noted they believe the Greek debt crisis is not yet resolved.

The company's results in Asia were very good, as the company realized growth in excess of 25%, with strong growth realized in South Korea and China. Of note, Guess? uses local manufacturing in South Korea (as well as in South Africa and the Philippines) as import duties are very high in those countries.

Guess? plans to open its first store in Japan in the near future and its online business is performing well, realizing a 20% growth rate in the fourth quarter.

The company's North American strategy is to focus on delivering a higher quality product, having lean inventory and tight markdown management in order to increase selling products at full price.

Competitors to Guess? include Abercrombie & Fitch (NYSE:ANF), Gap (NYSE:GPS) and Ralph Lauren (NYSE:RL).

As a result of the tepid earnings results in the previous quarter, the company's stock price took a hit, as shown below:

With the European headwinds facing the company, Guess?'s stock may be stuck in the cellar for a while. Additionally, with the company's exposure to bad news related to Europe, a protected covered call position looks like a smart investment to consider, as even if the price of the stock goes to zero, the maximum potential loss is 7.1%. The protected covered call also enables an investor to take advantage of receiving a dividend, assuming the position is not assigned. If the price of the stock increases to around the $36 range, the protected covered call position can most likely be rolled in order to realize additional potential income.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.