Tempur-Pedic (NYSE:TPX) saw its stock get halved today after the specialty mattress maker forecasted a disappointing second quarter, and lowered earnings estimates for the year. Temper-Pedic is facing increasing competition in the memory foam market where it has been dominant for years. The company boast wonderful returns on invested capital and has been growing margins through better operating leverage. I established my first few positions in the security be selling puts today. We sold the $22 January 2013 puts for $3.90 a piece. If these options expire worthless the returns would be 21.5% in 226 days, and if we end up getting exercised we will end up owning the stock at 6.5 times trough earnings. I really don't like the balance sheet much but I do believe this sell off is overdone. The positions we set were very light and are less than 15% of what we would consider to be a full position size.
Disclosure: I am long TPX.