The Option Tip Will Make Your Portfolio Shine with Tiffany & Co. Calls
Be prepared for this high-end jeweler to make an even higher run.
With earnings season upon us, it is essential to be cautious about entering trades in companies that haven’t yet announced their results, unless that is your strategy. However, with the right names, you can make money before and after the announcements, which is the basis for today’s trade.
For investors looking for an alternative safe haven to gold, diamonds could be an interesting choice. Demand for these gemstones continues to grow and, like gold, diamonds have been considered a store of value for centuries. Overall, diamond consortium De Beers expects growth in the global demand for rough diamonds to reach a new record this year, based on robust demand from China, India and other Asian emerging markets.
Tiffany & Co. (NYSE: TIF) looks like a diamond in the rough. This high-end jewelry retailer, designer and manufacturer is known throughout the world. It has pretty solid fundamentals and looks balanced financially, with a nice record of earnings-per-share growth.
Description of Tiffany & Co.
Tiffany & Co. is a holding company and conducts all business through its subsidiary companies. The Company, through its subsidiaries, including Tiffany and Company (Tiffany), sells fine jewelry and other items that it manufactures or has been made by others. Its segments include Americas, Asia-Pacific, Japan and Europe. Its Asia-Pacific and Europe segments are included in the Other. The TIFFANY & CO. brand (the Brand) is a primary asset of Tiffany and, indirectly, of the Company.
Tiffany also sells timepieces, sterling silverware, china, crystal, stationery, fragrances and accessories. Its products and services are marketed through a sales organization, advertising in newspapers, business periodicals and the publication of special catalogs.
The company was founded in 1837 by Charles Lewis Tiffany and is headquartered in New York, NY. Its Retail Service Center (RSC) is located in Parsippany, New Jersey.
The Covered Call Option Tip on Tiffany & Co.
TIF is expected to announce earnings Nov. 29 and today’s option tip, a covered call, uses options that expire shortly before their news comes out.
With covered calls, it’s often prudent to not pick a stock with a pending announcement, because the stock can lose more value than anticipated if the news is interpreted as being less-than-positive.
A covered call is when a trader or investor buys stock or already owns stock and, at the same time, sells a call as part of the same trade. This strategy can generate additional income for a stock position.
Another benefit of a covered call is that it is like purchasing the stock at a discount rate. The credit received from the short call offsets the purchase price of the shares of stock. In essence, the short call lowers the breakeven point on the trade. This is especially beneficial if the stock drops in price some.
The Reasoning for the Option Tip
The real sales gains – and an important contributor to U.S. retail sales gains lately – come from the luxury end of the market. Luxury jeweler Tiffany (TIF) reported same store sales up 24% last quarter.
Tiffany also saw sales in the Asia-Pacific region rise more than 46% in the first half of 2011 and could be a great play on the growth of Asia's new middle class.
Tiffany & Co, Swarovski and Jaeger-LeCoultre were the three highest ranking brands in an index of watch and jewellery websites and online presence, while others were found to be “running out of time online” according to the L2 Digital IQ Index.
While Tiffany’s digital efforts were rated as Genius, reaching the rank of number one with the comments: “a class by itself, Tiffany boasts the only m-commerce site and a flare for cross-platform programming” and Swarovski, labelled Gifted, was praised for its “huge Facebook community”, other jewellery and watch brands’ digital innovation was found wanting.
The Statistics to Support the Option tip
TIF recently came off its six-month low at around $56. The stock had a nice run-up in October and has gotten above its 200-day moving average again, which is a bullish sign.
The stock might take a breather before deciding to go higher, and it has the 200-day moving average just below the current price as support. Because the market has been unpredictable as of late, a covered call might give this trade a chance to profit nicely. A strike price of $75 by November expiration is a nice area to target.
A Consideration for the Option Tip
A small hiccup for the shares of Tiffany, which saw them tumble on Thursday, on concerns that a major engine of their growth -- China's fast-growing middle class -- may be sputtering. Tiffany shares fell as much as 11 percent in regular trade. The upscale jeweler derives a growing percentage of its sales in China.
However, with the market bounce on Friday, shares have regained their status quo.
The point to consider, in this instance, is timing the purchase of the option tip -- obviously Thursday’s dip would have been extremely beneficial in this regard.
Another point of importance is that the option scene is not inundated at this stage and creating out-of-control pricing!
Analyst Views & Ratings Affecting the Option Tip
Tiffany & Co.'s scale as one of the largest retailers of diamonds, particularly engagement and wedding rings, and its untapped potential overseas make it a good buy for an investor, an analyst said Monday.
Sterne Agee analyst, Margaret Whitfield, initiated coverage of the New York company, Tiffany & Co., with a "Buy" rating and a $90 price target.
She sees Tiffany & Co. as one of the largest retailers of diamonds, particularly engagement and wedding rings, and its untapped potential overseas make it a good buy for an investor.
She said that it's good that a large chunk of the company's revenue -- 28 percent last year -- is made up of sales of engagement and wedding jewelry, because such jewelry is relatively "recession proof." That means people are likelier to continue to buy pricey engagement and wedding rings even in a bad economy.
In its most recent quarter, the retailer known for its iconic turquoise box said that net income rose 30 percent on a 30 percent gain in revenue. Its stock is up about 16 percent since the beginning of the year.
Whitfield said Tiffany is "one of the premier luxury firms," and it has strong potential to grow even in places where it already has a lot of stores, such as the U.S. She said the company also had potential to expand in countries with emerging middle classes such as China, India and Russia.
Wealthier spenders have kept buying, while the less affluent have pulled back. But some speculate that won't last forever. A Fitch Ratings report last week suggested that if the recent volatility in the stock market continues, growth in spending on luxury goods could slow.
The Option Tip
Making the TIF Covered Call Trade
If TIF is trading at $72.39.....
Buy 100 shares of TIF @ $72.39 and sell the Nov 75 Call @ $2.89
Cost of the stock: 100 X $72.39 = $7,239 debit
Premium received: 100 X $2.89 = $289 credit
Maximum profit: $550 — that’s $261 ($75 stock target – $72.39 current price X 100) from the stock and $289 from the premium received if TIF finishes at or above $75 @ November expiration.
Breakeven: If TIF finishes at $69.50 ($72.39 – $2.89) @ November expiration.
Maximum loss: $6,950, which occurs in the unlikely event that TIF goes to $0 @ November expiration.
Managing the TIF Covered Call Trade Option Tip
The main objective for a covered call strategy is for the stock to just rise up to the sold call’s $75 strike price. The stock moves up the maximum amount without being called away, and the sold call expires worthless.
The breakeven point of the trade is structured to be at a nice area of support (200-day moving average) in the $69 area.
If the stock drops in price more than was anticipated, it might make sense to close out the entire trade (stock and short call) to avoid further losses.
“Diamonds are a girl’s best friend….therefore, make options trading the investor’s best friend.”