This week’s covered call trade is a defensive play on a retailer that has outperformed its peers amidst the market mayhem.

Cabot Profit Booster Issue: June 14, 2022

Market Overview
Heading into June expiration this Friday our EQT/DK/HALO/BMBL/DLTR positions are in good shape.

However, our most recent trade in ZIM is NOT, as the stock got crushed along with the market after we executed our position. This was a case of extremely bad luck, as the shipping stocks were the first to fall ahead of a nasty market sell-off. Because of this stock decline, we are going to take our loss today and move on from ZIM.

To execute this trade you need to:

Sell ZIM Stock

Buy to Close the ZIM June 67 Call

Of note, if you want to continue to hold your ZIM stock position and sell more calls to lower your cost basis, a sale of the July 60 call would be a strike I might target.

Moving on …

Increasing concerns about the rise in inflation again weighed on the market, as the S&P 500 had its worst week since January. The numbers weren’t pretty as the S&P 500 fell 5%, the Dow lost 4.6%, and the Nasdaq declined by 5.6%.

Yesterday was another rough day as the market is now pricing in an even more aggressive rate hike on Wednesday from the Federal Reserve. Buckle up!

This week’s covered call trade is a defensive play on a retailer that has outperformed its peers amidst the market mayhem.

The Stock – Academy Sports and Outdoors (ASO)
Why the Strength
Despite a turbulent economic backdrop, Academy Sports (ASO) has become a standout among sporting goods retailers. The company operates a chain of 260 retail outlets across 16 Southeastern states, with its biggest presence in Texas (with 108 stores). Nearly all of its locations that have been in operation for over four years have been consistently profitable in the face of an uncertain macro environment, thanks in part to what Academy sees as a consumer trend to enjoy a “healthier, happier, and more fun lifestyle,” a trend that accelerated during the pandemic but has remained surprisingly robust in recent quarters, too. What’s more, Academy just opened its first new location since 2019 (in Atlanta), and management has been pleased with the store’s performance to date, with expectations that EBITDA will be positive after the first year of operation.

Additionally, Academy plans to open at least eight new stores this year as part of a bigger plan to open 80 to 100 stores over the next five years, so there’s a cookie-cutter story here as well. Most important, results remain buoyant: In Q1, although revenue of around $1.5 billion was 7% lower from a year ago (partly due to its comparison with stimulus-driven 39% comp sales in the prior year’s quarter), it still exceeded estimates by 16%. When compared with pre-pandemic Q1 2019, moreover, sales grew each division by at least 20% (with outdoors increasing more than 50%!). E-commerce sales jumped 19% while per-share earnings of $1.73 beat the consensus by 32 cents. Looking ahead, analysts do see a slight dip in earnings this year, but the real story is that the drop isn’t going to be large—earnings should remain north of $7 per share this year (P/E near 5!) and grow as more stores open in 2023.

Technical Analysis
After peaking last November around 50, ASO rode the retail sector decline in the three and a half months that followed, bottoming at 30 in early March. A relief rally then kicked off which took the stock up to 42 by mid-April, but that’s when the market’s next leg down began, pulling ASO as low as 25—but that was likely the bottom. Shares have since catapulted higher, first on the retail rebound and then on earnings last week. The pullback of the past couple of days has been sharp but on reasonable volume and hasn’t taken back much of the May/June rebound. Stop - 28

The Covered Call Trade
Buy Academy Sports and Outdoors (ASO) Stock at 34, Sell July 32 Calls (exp. 7/15) for $3.30, or a Net Price of 30.70 or less

Static Return: $130 per covered call (4.23%)

Breakeven: 30.70

Covered Call Return (if assigned): $130 per covered call (4.23%)

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 30.7 or less. (In this case 34 minus 3.30 = 30.7. Or another example is you could pay 34.25 for the stock and sell the call for 3.55, which also equals 30.7)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on June 22, 2022.

Analyst Bio

Jacob Mintz

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.

Jacob developed his proprietary system during his years as an options market maker on the floor of the Chicago Board of Options Exchange, where he ran several trading crowds for nearly 10 years.

After a successful career on the trading floor Jacob was tasked with setting up a trading desk at a top-tier options trading company, trading against the most sophisticated hedge funds and institutions in the world.

Today Jacob trades for himself, coaches and teaches about options trading, and runs our Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster advisories. Jacob lives in North Carolina with his wife and two kids who keep him very busy with their sports and social calendars.