OK, so Kraft (KFT) wants to buy Cadbury – who is playing hard to get. To show how serious they are they sold their pizzas business to Nestles (N-e-s-t-l-e-s Nestle makes the very best – chooocolate!). Was that a smart move? Today the market thought so. Because of that, the JAN 26 Puts that I sold moved to near zero as the stock entered near-earth orbit – so I bought them back for 2¢ cents (why is there no ¢ key on a keyboard?). While I was checking the other conservative trades, I noticed LTD was only worth a nickel so I bought those back too – I had something else in mind.
Yeah, I know I wanted to own those stocks, but honestly, I wasn’t going to chase Kraft nor did I see the value in the way that LTD had moved in the last month. Reason being the dividend yield. LTD was at 3.6% back on 11/30 when I was willing to own it for $17, but now at $18 the yield changes to 3.2% and I know I can do better than that.
Enter Barnes & Nobel (BKS) with a current price of $19.27, a recent bull flag and a dividend yield of 5.17%. Besides, my son-in-law (a tech geek) did a lot of research and settled on the Barns & Nobel Nook eBook reader over Amazon’s Kindle for my favorite daughter. So what’s a good Put to sell for this? I settled on the FEB 20 currently paying 1.65. This would reduce my cost basis to 18.45 if Put the stock – and I hope I am. But, if not, I keep the huge premium. I will use all the cash left from the closing of the KFT and LTD Naked Puts to sell 7 of these Puts and collect a little over $1,100 and create a potential 5% gain on that account for February. Sweet!
Tomorrow we will see if I can still get good prices on the BKS FEB 20 Puts. I would have pulled the trigger today but I have to wait for my cash secured Puts to settle tonight before the money is available to secure another short Put.
So what do I really think of Kraft selling their pizza business? Have you been to the grocery store lately? How big is the frozen pizza section compared to the chocolate section? What about margins – which do you think is bigger? How may pizza restaurants compared to chocolate restaurants? I can’t get fresh chocolate delivered to my house. I would look silly eating chocolate and watching football. Pound for pound (and I can attest), what accounts for more consumption? Not a good move according to my palette! However, ask my wife… on second thought, don’t.
- Jeff
