Option combinations (often called buy/writes) can offer some of the best risk/reward ratios over time. When you combine the technique with a debt-free company sporting a low P/E, it looks even better. Here's an apparel manufacturer and retailer that meets those criteria, yet offers exceptional returns over the next five and one-half months.

True Religion (TRLG) closed at $20.55 Monday down from an early 2010 peak of $34.17. Consensus views are that it earned $1.85 last year and will see record EPS of $2.09 in 2011.

Its average multiple from 2005 through 2010 was 16.6x versus the sub-10x forward projection. As of September 30, 2010, TRLG had no debt and more than $127 million in treasury cash with just 25.5 million shares outstanding.

True Religion (TRLG) One Year

Source: Morningstar

View Chart

The recent pullback in the share price gives us a great opportunity for a large total return, even if the stock does almost nothing between now and July 16.

If True Religion creeps up 2.2% or better to close at $21.00, or higher, on July 16, 2011:

¿ The calls will be exercised and the puts will expire worthless

¿ You'll be left with no shares and $21,000 in cash

That will represent a net profit of $21,000 - $15,600 = $5,400.

This best-case scenario profit of $5,400/$15,600 = 34.6% cash-on-cash. That's about 75% annualized. Not too bad for a 5.5 month trade on a stock that barely needs to move up.

If TRLG fails to hold $21 on July 16, 2011 you'll end up owning 2,000 shares at a net cost of $15,600 + $21,000 = $36,600 = $18.30 per share. TRLG could fall by up to 10.9% without causing a loss on this trade.

While I can't guarantee that TRLG won't be below that price come July, I simply direct you back to the one-year chart to see what percentage of the time it spent anywhere near that level over the previous 12 months. Conversely, TRLG hit annual peaks of $23.70-$34.20 during each calendar year 2006-2010.

Trades: Buy 1000 TRLG for $20.55 per share, sell to open TRLG 10 July 21 calls at $2.25 and sell to open 10 July TRLG 21 puts at $2.70.

At the time of publication, Paul Price held no positions in the stocks or issues mentioned.

Dr. Price joined Merrill Lynch in 1987 and over the next 13 years worked with A.G. Edwards, Wheat First and Ferris, Baker Watts. Dr. Price enjoyed enough success to retire in October 2000, but he continues to write and give investment seminars.

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