3 Stocks to Short for Option Income

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Includes: GILD, NFLX, YOKU
by: Robert Weinstein

When it comes to establishing rules and regulation, everyone, high and low, should be treated alike.
--The Art of War.


My first pick for a great short by selling call options is YOKU. Youku.com Inc (YOKU) is a $6.11 billion market cap company. Youku.com operates as a Chinese internet video website. It offers user-generated and professional video content in China and internationally. I wrote about YOKU before and while it has come back off the recent highs it put in I believe it has a lot of air left under it to fall.

I think the fact that it is a Chinese stock requires investors to discount the financial statements because of the added risk. I think selling out of the money calls has less risk than an outright short and pays the seller a time premium for every day at risk. This stock is priced like it will take over the world. Any type of speedbump and it could lose half its value. The upside I believe is limited and if things do go well I think it will not go up much further as any value is more than fully priced in. The company was founded in 2005 and is based in Beijing, China. YOKU reported 4th qtr 2010 earnings of $-0.02 per share on 3/1/11 The next reporing quarter estimated mean earnings is $-0.08 per share. The low estimate is $-0.12 and the high is $0.06 per share. The current trailing twelve months P/E ratio is N/A (ttm) and the forward P/E ratio is N/A

  • Rising revenue year-over-year? Yes, $387.1 for 2010 vs. $153.63 million for 2009.
  • Rising earnings year-over-year? No, $-204.68 million for 2010 vs. $-182.29 million for 2009.

  • Rising EBITDA year-over-year? No, $-204.68 million for 2010 vs. $-182.29 million for 2009.
  • A dividend yield higher than I can earn in a bank account? No, $0 is a current yield of 0%.
  • Option trading available for the lowest risk entry possible? Yes.

The next stock is another one that I have written about and I have continued to follow. Pharmasset, Inc. (OTCPK:VRUS) is a $3.72 billion market cap company. Pharmasset, Inc., a clinical-stage pharmaceutical company, focuses on discovering, developing, and commercializing novel drugs to treat viral infections. Its primary focus is on the development of nucleoside/tide analogs as oral therapeutics for the treatment of chronic hepatitis C virus (HCV) infection. While they may have one of the better or best potential drug for hepatitis C it may be two years if all goes well before coming to market.

In the meantime VRUS is now marketing their latest hepatitis C drug. Other companies including Merck (NYSE:MRK) also compete in this space. This company has success built into the price, but has a long uncertain road in front of it. Even if successful, competitors are likely to dilute the profit potential. I think selling out of the money calls has less risk than an outright short and pays the seller a time premium for every day at risk. Pharmasset, Inc. was founded in 1998 and is based in Princeton, New Jersey. VRUS reported 2nd quarter 2011 earnings of $-0.55 per share on 4/25/11. The next reporing quarter estimated mean earnings is $-0.54 per share. The low estimate is $-0.77 and the high is $0.11 per share. The current trailing twelve months P/E ratio is Negative (ttm) and the forward P/E ratio is Negative

  • Rising revenue year-over-year? No, $1.02 for 2010 vs. $13.29 million for 2009.
  • Rising earnings year-over-year? No, $-66.08 million for 2010 vs. $-55.59 million for 2009.

  • Rising EBITDA year-over-year? No, $-66.08 million for 2010 vs. $-55.59 million for 2009.
  • A dividend yield higher than I can earn in a bank account? No, $0 is a current yield of 0%.
  • Option trading available for the lowest risk entry possible? Yes.

Netflix, Inc. (NFLX) is a $12.39 billion market cap company. Netflix, Inc. provides online movie rental subscription services in the United States. The company offers its subscribers access to a library of movie, television, and other filmed entertainment titles on digital versatile disc (DVD). Its members can get DVDs delivered to their homes and can instantly watch movies and TV episodes streamed to their TVs and PCs. While Netflix is becoming more known for their streaming service, the DVD rental portion of the business continues to generate income. Netflix faces continued competition from smaller players, and will soon face competition from much larger competitors such as Amazon (NASDAQ:AMZN). It is difficult to imagine with the increasing cost of content how an investor may have an edge buying a PE multiple of almost 80. I think NFLX makes a great short candidate. The company was founded in 1997 and is headquartered in Los Gatos, California. NFLX reported 1st qtr 2011 earnings of $1.11 per share on 4/25/11. The next reporing quarter estimated mean earnings is $1.11 per share. The low estimate is $1.02 and the high is $1.17 per share. The current trailing twelve months P/E ratio is 78.99 (ttm) and the forward P/E ratio is 36.19

  • Rising revenue year-over-year? Yes, $2.162 for 2010 vs. $1.67 billion for 2009.
  • Rising earnings year-over-year? Yes, $160.85 million for 2010 vs. $115.86 million for 2009.

  • Rising EBITDA year-over-year? Yes, $267.7 million for 2010 vs. $192.19 million for 2009.
  • A dividend yield higher than I can earn in a bank account? No, $0 is a current yield of 0%.
  • Option trading available for the lowest risk entry possible? Yes.

While not without risk I believe these stocks have become fully priced for total success. More importantly I believe that if they do continue to move higher, they will not move up faster than the time decay of out of the money calls.

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