Is It Time To Bail On Big Lots?
Is It Time To Bail On Big Lots? (BIG) Hello Smart Option Sellers! It seems the market is intent on pressing itself to the support levels I mentioned in Friday's late alert, as we are in sell-off mode again this morning which is pushing all the indices lower. This is also taking BIG down even further than its fall from last week. We are in a precarious spot with BIG. We can certainly take defensive action and lower our potential buy-in level, but the question now begs: do we still have faith in BIG as a whole? Digging a little deeper through its earnings report from Friday, the lowered forward guidance is the biggest concern for me. We never want to potentially be in a company that can't produce positive results in an ongoing basis. One or two bad quarters can happen to any quality company, but when you start getting into multiple back-to-back quarters of slack growth - you need to start looking a bit harder. This is where BIG currently sits. They've had a few quarters of soft earnings now and like I said, their updated forward guidance concerns me. So do we bail completely, or take defensive action and wait it out a bit more? Having to make this decision while the overall market gets hit, can muddle the answer. If the general market was on an upswing, BIG most likely wouldn't be getting hit as hard as it is. But it's not, and BIG is really getting nailed. I foresee a hard bounce imminently, that could take everything back up. But if it doesn't materialize, we could be in for even more pain. At the moment, with BIG stock near $29.25 per share, we're sitting at $3.25 below the $32.50 strike price. If we were assigned the stock today at the purchase price of $32.50, we'd be sitting with a $3.25 per share loss. On the other hand, if we wanted to get out today and buy the put option back, with our official sell-to-open price of this position at $.38 per contract, we'd have to buy it back at its current price of $4.00 per contract, which would lock in a loss of $3.62 per contract. So, here's what we're going to do: We're going to implement a defensive strategy for now ("the roll"), and lower our potential buy-in price. This will help us to potentially lessen any loss we might take, and if the stock rebounds, we'll be in a great position to close the trade for an overall gain. But we're going to keep a tight leash on it. If the stock (and general market continues to fall), we'll bail quickly and take our lumps with a loss. Here's how to execute the roll, and please read through all of these instructions before entering the trades. Buy back (buy-to-close) all of the BIG January 18, 2019 $32.50 put options as a closing transaction (buy-to-close). And... Sell (sell-to-open) the BIG July 19, 2019 $30 put options as an opening transaction (sell-to-open). You'll notice that I didn't put any prices on each option trade. Here's why: Currently, the January 2019 $32.50 put option is worth about $4.00 per contract. The July 2019 $30 put option is currently worth about $4.30 per contract. We want to make sure to sell the July put option for more than what we'll pay to buy back the January put option. This way, you'll come away with an overall small credit between the two trades. Here's how you will execute this two-part transaction: If you feel comfortable in doing this, and you can ask your broker for help, you can execute both trades in one single transaction called a "diagonal options spread". This way, you can specify a total credit between the two trades instead of having to manually execute two separate trades. Doing the spread trade is easier, but I also understand not everyone is knowledgeable, or even comfortable doing it, considering we haven't executed a trade like this yet. If you cannot (or don't want to) execute the spread trade, you can certainly execute two separate transactions. So, let's make sure we're all on the same page so there's no confusion. We want to buy-back (buy-to-close) the BIG January 18, 2019 $32.50 put options and sell (sell-to-open) the July 19, 2019 $30 put options. At the moment, the July put option is more expensive than the January put option. That's good! Make sure that if you execute these two trades as a single spread trade, you enter it for a credit of anything greater than $.10 per spread credit, The higher the better. This means you will take in more money from the new put-sell versus what you pay to buy back the old put-sell position. Click here and here to see what a spread trade looks like in the Charles Schwab platform. If you are going to manually execute two separate trades (because you can't figure out how to do it as a spread), then you still need to make sure you sell the July put option for a greater price than what you buy back the January put option. As I'm seeing it now, the July put option can be sold anywhere for at least $.10 per contract higher than what the January put option costs. Good? Lastly, you will execute these trades as "day-only" orders, not GTC (good-til-cancelled). If you are not filled today, then your order will automatically cancel at the end of today's session, and you will have to manually re-place the order tomorrow. I am doing this because prices can fluctuate more than usual from day to day, so I want everyone to have the best shot for getting the best prices. Oh, and also, if you don't have a position in BIG at all, you can disregard these instructions altogether. Ok, get to it, and let us know how you make out. I'll give an update tomorrow. This is unfortunate that BIG has moved in the wrong direction, but there are options (pun intended) to help us get on the right track. That's all for now. Continue to hold all other open positions as-is. Contact me here with fills, comments, questions or concerns. Regards,
Lee Let's Grab That Cash!