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Wall Street 'Put' Out by Nook Price Cut

Shares of Barnes & Noble slumped this week following the bookseller's decision to cut pricing on its Nook e-reader.



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Shares of

Barnes & Noble

(BKS) - Get Report

have had a rough week in the wake of the bookseller's decision to cut pricing on its Nook e-reader product.

Through Thursday's close at $15.94, the stock had fallen 6.6% since last Friday's finish at $17.07. The move represents half of its 14% year-to-date decline, assuming reinvestment of the 25 cent quarterly dividend. Much of the decline came on Thursday and it followed a spike in put option trading volume the previous day. The stock was rebounding slightly on Friday, adding 16 cents to $16.10 in recent trades.

Judging by the selling, Wall Street is less than enthused by Barnes & Noble's announcement on Monday of the expansion of its lineup of Nook e-readers to include a new model with Wi-Fi capability priced at $149 and the decision to discount the Nook 3G device to $199 from $259.

With the Nook's late entry into a crowded field where


(AMZN) - Get Report

, and to a lesser extent,


TheStreet Recommends

(SNE) - Get Report

were the innovators, along with the runaway success of


more versatile iPad, it's not surprising that investors are souring on the America's largest brick & mortar bookseller's ability to compete in the digital realm.

Goldman Sachs analyst Matthew Fassler weighed in on Monday, saying the price discount on the Nook was "an expected but unpleasant development." Fassler, who maintained a "sell" rating on Barnes & Noble's shares, also expressed skepticism about the company's online distribution strategy, saying it was likely that the company's "best customers (i.e. the most avid readers) will be quickest to move online at the expense of in-store sales," and citing the challenge of maintaining a "traditional retailing cost structure" under such conditions.

Some aggressive investors apparently agree with that assessment as 800 put options contracts at the $12.50 strike price expiring in October 2010 had exchanged hands early Thursday morning. They traded at a price of 60 cents, or $60 per option contract.

Since each put option gives the purchaser the right to sell 100 shares, the total trade would cost $48,000, giving the speculator the right to sell short 80,000 shares at $12.50. Kevin Baker, an analyst with

TheStreet Ratings

, who has extensive experience covering the options trading market, commented that this represented a huge increase in open interest in this option contract, as there were only 221 open contracts as of Wednesday's market close.

Baker also clarified the trade, saying that $11.90 is the break-even point, excluding commissions. If shares were to decline to $10 nearly four months from now, for example, the options would have an intrinsic value of $200,000, or $12.50 minus $10 times 100 shares per contact and multiplied by 800 contracts. Netting out the $48,000 investment, the trade could make $152,000.

For the trader(s) who wrote the options, assuming they were crazy enough to write naked put options the potential loss would be $952,000 if the company shares crashed to zero. Then again, according to Baker, "the broker probably shorted the shares at the same time as writing the contracts, creating a hedged position to avoid this catastrophic scenario."


Written by Philip van Doorn in Jupiter, Fla.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.