We searched for a protected covered call or collar using PowerOptions tools, seeking to find the highest returning positions for profitable value companies with a maximum potential loss of 8% and a stock price in an uptrend. The search produced children's clothing retailer Children's Place Retail Stores (PLCE), as shown below:
Following not too far behind Children's Place were the petroleum refining company Valero (VLO), the retailer Dillards (DDS), the petroleum refining and marketing company Tesoro (TSO) and auto manufacturer General Motors (GM).
A protected covered call may be entered by selling a call option against a purchased or existing stock and using some of the proceeds from selling the call option to purchase a put option for protection. The Children's Place protected covered call has a potential return of 2.7% (66% annualized) and a maximum potential loss of 7.9%. The maximum the protected covered call can lose (at expiration) is 7.9%, even if the price of the stock goes to zero.
The highest returning positions as shown above were found by selecting to sort by the highest returning positions. Profitable companies were found by selecting to search for companies with a Price-to-Earnings ratio (P/E) greater than zero. Value companies were included by selecting to search for a Price-to-Sales ratio (P/S) greater than zero. Stock prices for companies in an up trend were found by selecting to include companies with a 100-day moving average greater than the 200-day moving average. The 8% maximum loss parameter was selected, as a loss of 8% or less can often be recovered with some using income generating investment methods.
The Children's Place is a leading specialty retailer of children's products. The company markets its products via 995 company owned stores and via its online store. Competitors to the company include Gap (GPS), The Gymboree Corporation (private) and Target (TGT).
The company's stock price has been in a trading range between $40 and $56 for the last two years (shown below) and is off of its all-time high in the $70 range hit in 2006.
The shorts are all over the stock of this company with a percent short interest of 22.7% and a number days of short interest of 7.8 days. Percent short interest represents the percentage of shares short as compared to the number of share outstanding. Number of days short interest represents the number of days needed to close short positions with the current average volume of shares traded in a day.
In the company's most recent Q4 2011 conference call, Jane Elfers, President and CEO of the company, indicated the company has made tremendous progress in getting an executive team to drive the company, and has thus far replaced or upgraded half of the company's headquarter staff. The company plans to launch is first international store with a franchise partner in the back half of 2012. Additionally, the company's Canadian stores now have the same merchandise assortment as its U.S. stores.
The company is transitioning its product offering to made-for-outlet. Children's Place started the year with 3% made-for-outlet and ended the year with 35% of its products made-for-outlet. The company plans to transition to 80% made-for-outlet by the end of 2012. It was noted that this transition phase would dampen top line growth in 2012, particularly in the first half of the year. Comparable sales declined 2.7% in the quarter and were noted as primarily a result of warmer-than-expected weather and record high product costs. The company opened 88 stores and closed 34 stores in fiscal 2011. On a positive note, the company's e-commerce sales performed well as compared to the previous year.
With the company's upcoming Q1 2012 earnings call scheduled for May 17, 2012, a current investor in the company might consider entering the protected covered call position highlighted in the table above, as it provides for potential income and provides protection in case the company reports bad news. The specific call option to sell is the 2012 May 47.5 at $1.65 and the put option to purchase is the 2012 May 42.5 at $0.40. A profit/loss graph for one contract of the position is shown below:
For a stock price below $42.50, the value of the protected covered call remains unchanged (at expiration). And, for a price of the stock around $55, the position can most likely be rolled in order to realize additional potential return.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.