POT’N’FIZZ

National Beverage (FIZZ) profit rose 13% on strong sales. Net income cilmbed to $6.5M or 14 cents per share while revenues rose 6% to $143.5M. Management attributed the strong performance to price increases and an 8% rise in case volume. After hours the stock dropped to $7.98 per share after rising 6.29% to $8.11 during the day. The fundamentals for FIZZ remain strong with a Price/Sales ratio of 0.64, zero debt, $70M in cash and over half a billion in annual revenue with a market cap well under $400Bn.

Potash had another good day also, climbing $2.26 or 1.77% and our recently issued bull put Trade Alert is still in good shape. Although we have been highlighting for over a week now the value of bull put spread trades in this market, we cannot emphasize them enough. The leading stocks rebounded strongly over a week ago and the market followed, continuing its strong action today. Bull puts are a way of receiving capital into your account and a means of making money whether stocks rise, stay flat or even fall somewhat (but not below the short put strike price) from the time of trade entry. When the market changes direction these trades are excellent because you know that even if the breakout fails the likelihood of the market breaking below the old support level after it powerfully bounced off that level is low. If you are a more aggressive trader you can always look to purchase long call options but obviously the associated risk is higher because the stock must keep moving to make money and time-decay impacts the position on a daily basis.

In fact, the major difference between profiting with stocks and options is this time factor. Many believe that if they have had a successful history trading stocks that they should also do well trading options but it’s just not the case. Stock traders have the luxury of only needing to be right. Option traders have the added constraint that they need to be right in the given direction and in a specific timeframe. It helps not at all to see a stock rise after an option has expired worthless.

One of our members was expressing concern about the effects of time-decay on some long call positions. In our response we mentioned that our general rule is not to hold long options into the last 15-30 days prior to expiration. Time decay accelerates over that time period at a phenomenal pace and unless the stock is keeping pace, the long option will soon start to suffer. This doesn’t mean you that if you have a credit spread you should remove the long option from the spread as expiration approaches. In fact, for credit spreads you will almost always wish to hold the long option through to expiration because it protects the short option.

For example, in a bear call spread the removal of the long call option would lead to a naked call while in a bull put spread the removal of the long put would lead to a naked put. Naked puts are not as bad given that the worst that can happen is the stock drops to zero but naked calls can be much more dangerous since theoreticaly a stock can rise up without limit. In this market where volatility is prevalent and exaggerated moves are commonplace the last place you want to be is in a naked call option on a stock that rises each day. For example, earlier this year many Chinese stocks continued to rise without apparent correction. This may have seemed irrational at the time but that would not have helped the naked call seller whatsoever. Indeed it is from market movements such as these that the old saying "the market can remain irrational longer than you can remain solvent" originates.

Returning back to the stock market, one stock that showed tremendously strong price action today was NYX, rising 3.39% and is poised for a return to the mid-$90s if it can hold this level (a level it failed just a week ago).