Dell Could Be a Good Play for Options Writers

Dell Inc. (DELL) is at a multi-year low share price despite remaining solidly profitable and sitting on around $8 billion of cash [total debt = < $588 million.]

Dell earned $1.31 /share in FY 2007 [ended Jan.] and the projections are that they earn $1.50 in the new FY - their second highest EPS ever.

At the current $18.65 this is < 12.5x forward estimates. The last time Dell shares traded at this valuation was in 1996 - 1997 when the split adjusted shares were about to go from $3.10 to [their bubble elevated] $59.70 all-time high.

Dell had over $61 billion in sales last year and Value Line gives it an 'A' financial strength rating.

Here's the play I'd recommend today for those who are comfortable writing puts:

Sell Dell January $17.50 Leap puts expiring in 2010 for $2.92 /share.

Your break-even is $17.50 - $2.92 or $14.58 /share. That is lower than the low prices touched on Dell shares since 1998 when EPS came in at $0.53 versus this year's expected $1.50. This leaves you with a margin of safety of almost 28% from the current price to your break-even number.

The maintenance margin requirement is approximately 20% of the $14.58/share net imputed cost or under $3 /share.

If you leave this position alone until 2010 and it expires worthless, as I think is likely, your < $3 a share tie-up of capital will net a profit of $2.92. You'll have earned interest on OPM for almost two years. You'll [hopefully] report the gain of $2.92 /share on your 2010 tax return filed in April of 2011 gaining a 3-year tax deferment in a legal manner.

Disclosure: Author is short Leap puts on DELL

Comments

[George Nadel]

Selling Dell leap puts $17.50 is a great idea....but if you feel the stock is worth at least $20/share...sell that strike price or higher for an even larger return.