Dicks Sporting Goods (DKS) suffered a horrendous year in 2017, dropping over 60% at one point before finishing the year down 45%.
One thing I do at the end of each year is look at the worst performing industries and sectors. That was how I got long FSLR in 2017, you can read about that here.
When I did the same scan at the end of 2017 I noticed that Sporting Good Stores were the fourth worst performing industry for the year, partly due to the Amazon phenomenon.
At the time, DKS was trading at $29.12 and had just cleared above the 50-day moving average.
Since then, DKS has had a few ups and downs but has generally been heading in the right direction, recently trading as high as $35.80.
The stock has also climbed back above the 200-day moving average which is a positive sign.
Traders who believe the recovery in DKS has legs can take a conservative position via a cash-secured put.
The idea behind a cash-secured put is that you sell an out-of-the-money put, while also setting aside enough cash in the event of assignment. This would occur if the stock falls below the strike price at expiry. The seller of the put would then be forced to buy 100 shares of the stock at the strike price.
Most traders sell short-term puts to take advantage of time decay. However, going out further in time can provide some benefits via increased premium received and more time for the trade to work out in the investors favor.
Selling an out-of-the-money put generates income while gaining a bullish exposure to the stock.
Looking at DKS, the January 18th, 2019 $30 puts are currently trading around $3.35.
A trader selling this put would receive $335 into their account which would be theirs to keep. If DKS falls below $30 by January 18th, they would be forced to buy the stock for $30. The effective net cost of the position would be $26.65 thanks to the option premium received.
That’s 21.64% below today’s price.
If the stock stays above $30 at expiry, the puts expire worthless leaving the trader with a health 11.17% return on capital at risk.