Position Theta's  Instablog

Buckle Inc. Diagonal Ratio Spread Summary: On 10/23, I purchased a diagonal ratio call spread on Buckle Inc. (BKE), which consists of purchasing 6 in the money June 2010 25s, and selling 4 in the money December 2009 30s, for a net debit of $2900.

Break-Even Point: Break-even point is likely around 28 to 29, depending on the IV of the June calls at December expiration.

Max Profit: Maximum profit is theoretically unlimited because I am long two more June 25s, then I am short December 30s.

Potential Downside: Downside is limited to my net debit of $2900.

Greeks: Similar to my three other diagonal call spreads, delta and vega are substantial, and theta is positive, and will increase approaching expiration.

Rationale: Buckle is a well managed, casual apparel, mall-based retailer. Buckle has been and is currently growing rapidly, but doing so in a principled manner and without the use of debt. EPS has grown from .86 in 2005 to 2.24 in 2009. Throughout this period, Buckle has generated substantial cash and has been a net buyer of its stock. Its five-year average revenue growth rate is 13.4%, while its five-year average EPS growth rate is 26.4%, a result of both share repurchases and margin expansion. Buckle generates terrific and peer-beating returns on assets and equity (without the use of debt), which were 18.38% and 24.08% in 2008. Nevertheless, the market is currently valuing Buckle's equity at historically low multiples of earnings due to the tough retail market - it's trading at around 6x EV/trailing EBITDA or 12x trailing earnings. Given management's track record and the current valuation, I am bullish on Buckle's near-term, and even more so, its long-term prospects, but appreciate the potential challenges both to its stock price and its business. This position provides some near-term downside protection and profits from time decay, while preserving upside. In the event Buckle's stock slides substantially in the near-term, I will look to gain further upside exposure.

Note that Buckle reports earnings November 17th, which will likely cause a substantial move in the stock price.

Disclosure: Long BKE