A Crocs Play for Chickens

To all out there who think maybe now that CROX has come down enough...

Here's a play that lets you work with CROX at a much reduced risk but still good upside--
even if it pretty much just sits through next January.

CROX is now trading at $10.32/share.

Here's a relatively low-risk way to play right now.
Multiply by any number of 100 share lots to get to your own normalized position size.
................................................Cash Outlay/Cash Received

BUY 100 shares CROX @ $10.32=($1,032.00)/0

SELL 1 Jan. 2009 $10 Covered Call @$3.10=0/$310.00
SELL 1 Jan. 2009 $10 Naked Put @$2.80=0/$280.00

Net Out-of-Pocket Outlay ($442.00)

On expiration date - January 16, 2009 - if CROX is still $10 or above:

Your shares will be called away at $10- you will receive $1000.

Your put will expire worthless

You will have NO shares, No options and $1000 cash for your $442 net outlay.
Your cash-on-cash return will be 126% in 9 months.

This allows for CROX shares to drop by $0.32 or 3.1% between now and January 16, 2009.

Break-even is calculated as follows:

Shares bought at $10.32 less $3.10 call premium = $7.22 B.E. point
Put written at $10 strike less $2.80 put premium received = $7.20 B.E. point
Average break-even on the whole position = $7.21 /share [ignoring commissions]
CROX could fall by up to 30% from your starting price without you suffering a loss.

If you believe CROX will hold at $10 or higher it's a spectacular return.

Comments

[Dr. Duru]

Great idea. I was wondering whether it was finally time to make some kind of play on CROX upside and this one has a decent risk/reward configuration. The CROX director who bought almost $5M worth of stock on March 6th for near $20 a pop is sure hoping for *at least* $10/share!

[Paul Lopez]

Hi Paul - I normally don't like to hold a trade that long. You would have an option requirement to hold on to the naked put over the time frame. Why not just buy the 100 shares and sell the front-month $12 covered calls each month (for around .50) for 9 months or until called away?

[I don'tthink so]

CROX is a "swing for the fences" kind of stock and you are laying down a bunt with this idea. I would either be long or be short, depending upon your opinion of the company's future, but I don't like this trade with options at all.

Noted with all due respect to all investors

[1machoduck]

Here's my play: sold naked April Put for $2.10 was assigned stock, (Crox cost: 10.40) I figured it would be at least $11 on expiration Friday...Ok we missed that one and paid .18 cents over close, no problem.
Next week we will wait for pop to $11 then will sell May 12 call for about 1.50, (29% return) if we don't get that move next week, following week we will sell May 12 Call at .60 or .70 ... if assigned (fingers, legs and eyes crossed) we'll rack up a 21% plus return. Not bad for a 30 day play, if not called away then a measly 6 or 7% will have to do.
Our feeling is the stock just got beat up...the product is a winner and still has big time sales ahead!

[Rafer]

When you sell a naked put, you are required to put down an amount equal to the put price x 100 shares, in the case of your example, this would be a $1000. So your out of pocket expense is $1,442. So, if called away you will make $590 for a $1,442 investment, not bad, but not as good as you indicated.

[Paul Price]

Rafer,

That's not correct. You just need to have 'marginable equity' sufficient to carry the size of your naked put positions. That requirement can be met with fully paid stock, t-bills, marginable ETFs etc. No actual cash is needed to be put up.

My figures are accurate.

[kotika98]

Long stock + sell call = sell put
(by put/call conversion parity)
so in essence, you are selling 200 puts . No wonder your breakeven point is 10 - 2.80 = 7.20
It is indeed a limited risk/limited reward situation, and will likely turn out profitable. After all the probability of Corcs going bankrupt is significanly less than 28% IMHO.

[Rafer]

Paul,
You are absolutely right that you just need sufficient 'marginable equity', not cash, but I believe 'marginal equity' still represents cash. Yes, it's cash already invested and you are leveraging it (buying on margin), but if you wanted to buy a home and liquidated your 'marginal equiy' for a down payment, you would have to leave an amount sufficient to cover the size of your naked put positions in your account.

[BoulderBiker]

Stock is going to 5 bucks.

[sniper6]

Biker- quite right. Earnings today at 4 p.m. will suck, the shit will come crashing down- 15 or 20 % loss by the bell, $5 end of next week. Go Short.

[DanielJacome]

blah blah, CROX is dead in the water -- look at the weak international numbers that just hit the tape -- it is seeing a squeeze here but it seems that the St is comparing non GAAP guidance to GAAP consensus -- don't trust this management team whatsoever.

We reiterate $9 PT on CROX shares....

[Paul Price]

Looks like Crox is alive and well...blah, blah, blah.