Bullish On Fossil

May.21.12 | About: Fossil, Inc. (FOSL)

In a previous article related to fashion marketer Fossil (NASDAQ:FOSL), a protected covered call was considered for the company, as the company's earnings release was fast approaching. The protected covered call was considered as it provided an investment positioned for generating a return while also protecting against a large drop in Fossil's stock price. A protected covered call may be entered by selling a call option against a stock and using some of the proceeds from selling the call option to purchase a put option for protection.

In the company's Q1 2012 earnings call held on May 8, 2012, the company indicated sales fell short of their targets, and as a result Fossil's stock price took a big hit as shown below:

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The company's missed sales targets were a result of weakness in Europe and in parts of Asia. Also, Fossil's first quarter is typically its slowest quarter and the comparables from the prior year's results set a fairly high bar to hurdle. The company noted that they think they missed some sales opportunities due to not having enough spring color with respect to watches and accessories. Additionally, the company experienced a sales decline in eye wear due to a pullback related to U.S. department store and exiting the optical frames business in Europe. The company expects softness in Europe to continue, but thinks the company can double in size in the next five or six years. On a positive note, Fossil added the Skagen brand to its portfolio of brands and plans to open 70 to 75 stores this year.

The price of Fossil's stock is down -49% since the announcement of the poor earnings and European outlook, but the protected covered call considered in the previous article is only down -4.9%. Its much easier to recover from the loss of -4.9% for the protective covered call than it is to recover a -49% loss for a long position in Fossil's stock.

While the short-term prospects for Fossil appear cloudy, the long-term outlook for the company looks very good. Additionally, Fossil's current stock price is near the company's previous support level in the $70 to $75 range. Based on this, closing the protected covered call position and entering a bull-put credit spread for the company will be considered in order to recover from the loss on the protected call and to potentially generate a profit. A bull-put credit spread may be entered for a net credit by selling one put option and purchasing another put option further out-of-the-money, with the goal of the options expiring worthless and keeping the initial net credit as a profit.

Using PowerOptions tools, a bull-put credit spread for Fossil was found with a potential return of 9.9% (138.8% annualized) as shown below:

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For success with the bull-put credit spread shown above, the -4.9% loss from the protected covered call will be recovered while generating a nice 5% profit. The specific put option to sell is the 2012 Jun 60 at $0.75 and the put option to purchase is the 2012 Jun 55 at $0.30. Entering the bull-put credit spread results in receiving a net credit of $0.45. A profit/loss graph for one contract of the Fossil bull-put credit spread is shown below:

A management point of $63 is set for the position. If the price of the stock drops below $63, then management of the position for an exit or roll should be considered.

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