EOT Trade Alert – April 9, 2009

Corey Williams | April 9, 2009

April 9, 2009

Trade Alert:

Buy SPLS June 2009 $20 PUTS at $1.70 or better (PLQRD)

Company Background:

Staples (SPLS) is an office products retailing company. They provide office products including supplies, technology, furniture, and business services. The company operates over 1,800 stores throughout the US & Canada.

Short-Term Catalyst:

Everyone knows how bad the economy is right now. Consumers are cutting back in big ways. Businesses are doing the same. Just look at the recent news on commercial real estate.

Landlords are going bankrupt.

Businesses are cutting back on the space they need or going out of business. The amount of business space at mall and shopping centers was down in the first quarter by 8.7 million square feet. Vacancy rates are at 9.1%, up to their highest levels since the 1990s!

So tell me, if small businesses can’t afford to pay their rent, do you expect them to be spending big bucks at office supply stores?

No, of course not.

Here’s another data point to chew on. Staples doesn’t just sell office supplies. They also sell office furniture and technology (like computers and printers). These big ticket items provide a good chunk of their revenue. I just don’t see small businesses rushing out to expand their business any time soon.

Back in early March the company announced results… and it wasn’t pretty. Earnings fell by 14%, missing analyst expectations. They continue to see weakening same store sales… a key metric in the industry.

So, you’d expect to find the stock languishing at new lows… right?

That’s just not the case. Staples has jumped significantly in this latest stock market rally. The stock was down around $14 a share in early March. Since then the stock has climbed to over $20 a share… a jump of more than 42%. I think it’s too far, too fast. This stock should crumble at the first sign of weakness.

On a technical basis, the view is mixed. The stock has recently seen a short-term moving average cross over to the upside. The stock also recently broke above the 200-day moving average. This movement just doesn’t fit with the fundamentals in the market. I’m expecting the stock to trade lower going into earnings at the end of May.

Trade Details:

Option Ticker Symbol:	PLQRD
Underlying Stock Symbol:	SPLS
Current Bid-Ask Price:	$1.45 – $1.50
Option “Buy Up To” Price:	$1.70
Break-Even On Stock At Expiration:	$18.30
Maximum Risk Per Contract:	$170

Exit Strategy:

SPLS is trading at $21.04 per share. Resistance levels will be at $24 and again at $26. Remember, we want this stock to move lower. Support levels will be at $16 and $14. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

Chart: