Use Options For A Chance To Buy RH At A 42% Discount

Looking back to 125 days ago, Restoration Hardware Holdings, Inc. (RH) priced a 8,000,000 share secondary stock offering at $70.00 per share. Buyers in that offering made a considerable investment into the company, expecting that their investment would go up over the course of time and based on early trading on Thursday, the stock is now 5.4% higher than the offering price.

Investors who did not participate in the offering but would be a buyer of RH at a cheaper price, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the January 2016 put at the $50 strike, which has a bid at the time of this writing of $7.10. That would result in a cost basis of $42.90 per share before broker commissions in the scenario where the contract is exercised. If the contract is never exercised, the put seller would still keep the premium, which represents a 14.2% return against the $50.00 purchase commitment, or a 6.5% annualized rate of return (at Stock Options Channel we call this the YieldBoost).

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Top YieldBoost Puts of of Stocks with Recent Secondaries »

Secondaries can often present buying opportunities for bullish investors interested in purchasing shares, because the sudden extra supply of stock tends to require that the offering be priced at an attractive discount to where the stock had previously been trading before the offering announcement. That can also introduce near-term volatility which improves the premiums a put seller can achieve. Selling a put does not give an investor access to RH's upside potential the way owning shares would, because the put seller only ends up owning shares in the scenario where the contract is exercised. The chart below shows the one year performance of RH shares, versus its 200 day moving average:

Restoration Hardware Holdings, Inc. Chart

Looking at the chart above, RH's low point in its 52 week range is $30.92 per share, with $78.50 as the 52 week high point — that compares with a last trade of $74.27.

According to the ETF Finder at ETF Channel, RH makes up 3.27% of the SPDR S&P Homebuilders ETF ( XHB) which is trading up by about 1.3% on the day Thursday.

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