RACK Fell 18% Today – How to Profit from It

By | February 2, 2007

It was a good thing I sold RACK two weeks ago. The stock plummeted $3.65 or 18% today after yesterday’s release of earnings report and guidance. Not long ago, on Jan 17, 2007 the stock tanked more than 50% to the low 20’s from the low 30’s. I took advantage of the shortfall and picked up some shares on the cheap and flipped it for a profit. Today, the stock screams to me again for an inviting opportunity.

Today’s volume of almost 20 million shares indicates tremendous downward pressure. The confidence of the shareholders has been seriously shattered. With so negativity, the selling may not be over yet. However, the management is still extremely confident in its ability to deliver more than $500mn in revenue for 2007.

Notablecalls: “RACK looks like a low downside/high upside/very high risk investment. One for longer term investors who can stomach volatility. As for the s-t, stock will probably stay range-bound for a while, as the confidence has really gotten hit. It will take time and hard evidence for the mkt to get more positive on the stock.”

So, here are my thoughts on ways to profit from this stock. One way to play is to short the stock or sell an uncovered call in the short term. I would think this is a good (risky) short term strategy but in the long run, this company should be able to restore confidence in its market. Another way is to long the stock after the selling levels off. But I don’t know where the bottom is. I can buy shares and protect myself with a stop limit or a put. Or I can buy a leap call. Obviously, like Noteablecalls mentioned above, this requires a lot of patience. The other way to play it is to bet on the volatility. Buy straddle/strangle options. This way, I need not to predict the direction of the stock. As long as the stock moves a sizeable amount up or down, I would profit from it.

Trading Strategies:

1. a) Short the stock.
b) Sell an uncovered call.
2. a) Wait until selling levels off. Buy the stock.
b) Buy the stock. Set stop limit or buy a put.
c) Buy a leap call.
3. a) Buy a straddle option.
b) Buy a strangle option.
I’m thinking about buying a leap call and wait until the stock rebounds. What are you thoughts?

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