If Costco (COST - commentary - Cramer's Take) drags down Walgreen (WAG - commentary - Cramer's Take) in the retail dip, I'd look to scoop up some call options in the drugstore chain.
Costco is going to a big loser today after it revealed that even though revenues were climbing at one of the highest rates in the business, it had kept prices so low it wasn't making any money on those sales.
This strategy to gain market share instead of maximize profits reminds me of many of the tech-bubble dot-com companies that were based on the business plan, "Sure, we lose money on each sale, but we make it back in volume." It's somewhat shocking that Costco cut it so close to bone. I guess it was hoping to emerge from the economic slowdown in a more powerful position, and that still may be true over the longer term. But for now, the market is going to shoot what had been the general of the retail sector. Expect heavy option volume and a leap in implied volatility.
In cases like this, where a stock has a big gap down, I like to look at the "broken stock" play. That is, sell calls -- or a call spread, to limit risk -- for a credit on the notion that it will take some time for the stock to repair itself. Then you just sit back and watch time decay and the eventual decline in implied volatility, especially if the stock stabilizes, work in your favor and collect that premium. With the stock around $63, I'd look at selling the August $65 calls and use a stop such that if the stock climbs back to $69 -- an area of heavy resistance -- I'd close the position.
The other name I'm looking at is Walgreen, but in this case, I'd be looking to establish a bullish position by purchasing calls. If there is spillover selling and WAG can trade down toward the $32 support level, I think September $32.50 calls for around $2 a contract represent a terrific buy.
RSS FEEDS
PODCASTS
