SHLDQ - Sears Holdings Corp

[peridotcapital]

I checked out the Portland property that is on Seritage's website. Its address is "9800 sw washington square Rd portland OR". It is indeed a Sears Auto Center and has no signs of redevelopment. They are still open and I can see there is a car in the service bay.

 

I also checked out a Kmart center nearby that was closed in 2012. Its address is 7655 SW NYBERG RD, TUALATIN, OR. It was actually more close to my home than the Washington square mall. However it was really rundown. I've only been there once 6 years ago. This one is interesting. It has already been tear down is being redeveloped. A developer from California is going to spend $65M to build four retail buildings on its site. Here is the local news -

http://www.oregonlive.com/tualatin/index.ssf/2013/08/nyberg_rivers_tualatin_shoppin.html

 

I don't see any connection of the redevelopment with Sears or Seritage though. I don't even know if this one was owned or leased by Kmart before. The county's tax assessment shows an estimated of $9.7MM market value, breaking down to $6.5M of land value and $3.2M of improvement -

http://www.portlandmaps.com/detail.cfm?action=summary&propertyid=W245792&address_id=212340&x=7622659.006&y=634121.850&state_id=2S124B002100&site_name=7655%20SW%20NYBERG%20RD&city=TUALATIN&ResultCount=1

 

I guess if Kmart owned it, they likely sold it for between $6.5M and $9.7M, not too bad.

 

Thanks for checking those out! It's interesting that the Auto Center is still open. If Eddie was still contemplating spinning off that business, why put some of their locations inside Seritage? And if that location is cash flow positive (I'm hoping he would close it if it wasn't), it also makes little sense to put it inside Seritage. Maybe they own the land and they just want people to know that for the right price they could buy it.

[heth247]

Thanks for checking those out! It's interesting that the Auto Center is still open. If Eddie was still contemplating spinning off that business, why put some of their locations inside Seritage? And if that location is cash flow positive (I'm hoping he would close it if it wasn't), it also makes little sense to put it inside Seritage. Maybe they own the land and they just want people to know that for the right price they could buy it.

 

That's my thought as well, Chad. It probably does not make sense to re-franchise/convert it to another auto shop but that is a good location and somebody might want to tear it down and rebuild, just like the other Kmart center location I referred to.

 

[bmichaud]

"That area already has too many car shops. And most of the time, the parking lot of that Sears Auto Center is empty.  How are you going to collect easy money by franchise Sears Auto Center for that location?"

 

If that's the case, then I stand corrected. Sounds like it does need to be redeveloped.

[bmichaud]

So Baker Street's low case break up valuation is $85 and it assumes $900MM to wind down "unfeasible stores".

 

Let's say the 1636 remaining stores are deemed unfeasible. It cost about $1.6MM per store to wind down 55 stores in the first 9m of 2013 - bump this to $2MM and that brings the cost to wind down the 1636 to $3.3B. Net of the $900MM baker estimate, that's $22 we can take off their worst case break up value...or $63 in a worst case.

 

The question obviously is how long will it take to wind down the 1636. I can't imagine Lampert will continue to let the enterprise bleed while covering it up with valuable asset sale proceeds.....

[merkhet]

I know we've been batting around the possible valuation of Seritage with back of the envelope calculations, but I decided to just take an afternoon and bang out a little bit of color on the valuation.

 

I've gone to the Tax Assessor's website for every single property listed as a Strip Center, and I've got the following numbers:

 

Total Valuation*: $269,400,891.00

Total Sq. Footage: 6,262,175

Avg. $ per Sq. Ft: $43.02

 

I put an asterisk (*) on the total valuation because I wasn't able to find the tax information for the following properties (though I included them in the total square footage):

 

(1) 94.899 sq. ft.

1325 East Jackson Street

Macomb, Illinois

 

(2) 87,693 sq. ft.

1500 W Lincoln Highway

New Lenox, Illinois

 

(3) 94.041 sq. ft.

7530 S Anthony Boulevard

Fort Wayne, Indiana

 

(4) 67,406 sq. ft.

3010 Fort Campbell Boulevard

Hopkinsville, Kentucky

 

I'm currently working on the Multi-Tenant properties, which largely seem to be listings of Sears Auto Centers that aren't terribly profitable/useful.

 

I'll report back periodically as I piece this together.

[heth247]

That's my thought as well, Chad. It probably does not make sense to re-franchise/convert it to another auto shop but that is a good location and somebody might want to tear it down and rebuild, just like the other Kmart center location I referred to.

 

To illustrate that the Sears Auto Center is in a good location, it only has 31,735 sq ft but is tax assessed to be worth of $11.8MM, $2MM more than the much bigger 96,643 sq ft Kmart center that has been snapped up by the California developer and is being redeveloped. Looks like that we just need to find a buyer  ;)

 

http://www.portlandmaps.com/detail.cfm?action=summary&x=7616681.74582&y=657225.557371&site_name=9800-9899%20SW%20WASHINGTON%20SQUARE%20RD%20&city=PORTLAND&ResultCount=1

[merkhet]

I have a question that I want to pose to the community here...

 

Let's use the first two Multi-Tenant properties as examples:

 

(1)

 

McCain Mall (see attachments) has two clear tax records for Sears. The first one, the 157,888 sq. ft. box, is clearly a Sears department store.  The second one, the 20,676 sq. ft. box, is clearly a Sears Auto Center.  When you look at the flyer, it's fairly obvious that the 19,072 sq. ft. that's being offered is the Auto Center.

 

However, the price per sq. ft. for the department store is $45.24 versus the Auto Center at $16.79. 

 

Should we think of Sears as offering the space up at the price attributable to the Auto Center or the price attributable to the department store?  Perhaps there will be some spend to pretty up the Auto Center so they can charge department store type rents?

 

(2)

 

Arrowhead Towne Center (see attached) does not break out the tax assessed value by property.  You'll see that they clearly delineate a 110,200 sq. ft. box and a 9,166 sq. ft. box, but they do not break them down by the tax assessed value.  Instead, a total tax assessed value of $7,024,700 is given for both properties.

 

In this case, it is clear that the price per sq. ft. will be inflated by the inclusion of the department store, but I'm at a bit of a loss as to how to break out the pricing -- or, to go back to the first question, whether to break it out at all.

 

Thoughts?

Little_Rock_-_Flyer.pdf

Little_Rock_-_Taxes.pdf

Glendale_-_Flyer.pdf

Glendale_-_Taxes.pdf

[merkhet]

 

 

That's my thought as well, Chad. It probably does not make sense to re-franchise/convert it to another auto shop but that is a good location and somebody might want to tear it down and rebuild, just like the other Kmart center location I referred to.

 

 

To illustrate that the Sears Auto Center is in a good location, it only has 31,735 sq ft but is tax assessed to be worth of $11.8MM, $2MM more than the much bigger 96,643 sq ft Kmart center that has been snapped up by the California developer and is being redeveloped. Looks like that we just need to find a buyer  ;)

 

http://www.portlandmaps.com/detail.cfm?action=summary&x=7616681.74582&y=657225.557371&site_name=9800-9899%20SW%20WASHINGTON%20SQUARE%20RD%20&city=PORTLAND&ResultCount=1

 

 

I think you're pointing out the same issue that I've found with the Arrowhead Towne Center property. Sears & Sears Auto Center BOTH share that address, so the $11.8 million valuation includes both the department store and the Auto Center...

[heth247]

I think you're pointing out the same issue that I've found with the Arrowhead Towne Center property. Sears & Sears Auto Center BOTH share that address, so the $11.8 million valuation includes both the department store and the Auto Center...

 

I think you are right. When you pull up the map, the red rectangle included not only the Auto Center, but also the Sears department store across the street.  Then if I click on the department store, then the number changes to COMMERCIAL LAND  679,210 sq feet, but with the same address and $11.8M of assessed value. So they are bundled together.

[heth247]

But if you look at Seritage's flyer, it only highlighted the Auto center. So maybe the "tax-value" approach is not the best way to apply here.

[merkhet]

 

But if you look at Seritage's flyer, it only highlighted the Auto center. So maybe the "tax-value" approach is not the best way to apply here.

 

 

It worked great for the Strip Centers. Maybe what I should do is put together a base case (Auto Center valuation) and a bull case (department store valuation) for each of the Multi-Tenant properties...

[texual]

Well this thread certainly blew well past my expectations, 300+ pages. Maybe its me but I believe all these issues we're discussing are hard to evaluate especially as they are mostly real estate considerations which we do not have a firm grasp on knowing what ESL plans on actually doing.

 

Who knows, maybe he buys BAC shares using whatever cash is left over from the sales of stores. And then he just goes into stock and bonds and small businesses he can collect meanwhile all this real estate will just be a cash source until he grows the portfolio at SHLD? I dont think posting endlessly here about SHLD is helpful to anyone and I am having trouble actually following the thread of logic going on.

 

Wellmont asked good questions and none of us have answers because for many (myself included) this is a jockey stock except the jockey is doing whatever he likes and we have no idea what his next move is. We're faith based investors no matter how much you slice up this real estate discussion or post news articles about Seritage properties. It may have little or nothing to do with the long term plan for SHLD.

 

 

I'd rather we focus on news coming from ESL directly or regarding the shares instead of whatever flavor of the quarter 'real estate' moves we think could happen.

 

 

just another tired investor in shld.

[heth247]

I'd rather we focus on news coming from ESL directly or regarding the shares instead of whatever flavor of the quarter 'real estate' moves we think could happen.

 

Not sure what you are suggesting to do by "focus on news from ESL directly". What else news is ESL giving out? Eddie does not even hold a conference call anymore. We all agree that SHLD is a asset play, and by asset, it is mostly RE. Why is it wrong to zero in on RE?

 

To me this is like that we are trying to solve a riddle by Eddie, it is frustrating but fun.  ;)

 

[ERICOPOLY]

Suppose you were able to write a 5 year put on SHLD (even though you can't)...  Even though you get a strike adjustment on each spinoff, the price stability of the stock left behind (that you wrote the downside on) might get more and more crazy as increasingly (with each iterative divestiture) you own a piece of something backed mostly by the retail and less by easily identifiable non-core assets of clear value.

 

 

[adesigar]

New guy on the board.  Not an expert so maybe im missing something obvious. I’ve read the last few months of posts on Sears and I don’t get why Sears and Kmart are considered a dead retailer whose properties need to be spun off in a REIT. SHLD still does 40 Billion in sales. Net Income for the last few years has been affected by depreciation, Pensions and SYW.

 

1. Depreciation - Sears has been claiming annual depreciation of about $850-$900 Million and has Capex of $400 million which is shielding 500 million of Income. He can’t claim $900 million in depreciation forever.

 

2. Pension plans - Pension plans contribution from Sears are not going to continue forever. Pension benefits for Sears and Kmart associates were ended in 2006. Pension funding obligations were as follows 

      2006 - 828 Million,

      2007 - 959 Million

      2008 - 2057 Million

      2009 - 2227 Million

      2010 - 2493 Million

      2011 - 2990 Million

      2012 - 2475 Million

This giant increase in pension liabilities happened even though Sears Holdings contributed hundreds of million every year. All of this was caused by a drop in interest rates. When interest rates go back to normal levels the decrease in liabilities and increase in net income would be significant.

 

SHLD Annual report says the following about the effect of interest rates on Pension Liabilities.

millions                                                                              1 percentage-point Increase    1 percentage-point Decrease

Effect on interest cost component . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30                                  $ (39)

Effect on pension benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . $ (674)                                $ 814

 

 

3. Shop Your Way – I don’t see SYW as a way to clear inventory. I think Lampert is trying to set up a membership rewards club that works across retailers. In the short term it is increasing costs because of promotional activity and member redemptions. The steps I see in SYW taking and this is coming out of my magic hat but it’s what I think Lampert is aiming for.

      a. Set up a rewards program at Sears and Kmart that gives Cash back to SYW members, sign up lots of members who get used to using SYW – Step completed by Sears

      b. Have them link their Credit or Debit Card so they can earn points from other vendors – Step completed by Sears

      c. Contract with other companies to send SYW customers their way. Sears gets a percentage of sales from these other vendors and passes on most of this to SYW members for use exclusively at Sears and Kmart.

        d. Sears earns some money from other companies using SYW and also increases sales as SYW members redeem points earned from other vendors at Sears.

You can earn SYW rewards points from Burger King, Liberty Mutual insurance, Directv, Dish Network, Sprint, Avis, Budget,  ADT, Popeyes, Public Storage, 1800Flowers, and also for me 2 farmers markets. I don’t believe Sears is giving points for people to shop at or use these services without receiving anything in return.

 

Sears should report decent income when claimed Depreciation drops, Pension contributions fall because interest rates increase over the next couple of years and SYW makes money instead of the current losses or SYW just breaks even/goes away.

 

 

[Guest hellsten]

3. Shop Your Way – I don’t see SYW as a way to clear inventory. I think Lampert is trying to set up a membership rewards club that works across retailers.

 

There's this other company that has a similar model as SYW and Sears.com. The company is Overstock.com and it has a very asset-light business model. In the worst case SYW could be something like Overstock.com, in the best case Amazon.com (LOL). I would be surprised if Eddie can't make it profitable. SYW would be part of the "delicious pork bits" left after Sears has gone through Eddie's oven. Or is it an incinerator?

 

https://seller.marketplace.sears.com/SellerPortal/d/switch_account.jsp

vs.

http://www.overstock.com/business-programs

http://www.overstock.com/club-o-rewards-program

http://www.overstock.com/SellInventoryRequest

[bmichaud]

Building off of Merket's great work....

 

Here is the Peoria, AZ property info sheet from Seritage: http://www.seritage.com/portals/0/pdf/strip-centers/AZ%20Peoria%20%289406%29%20-%20STRIP%20CENTER%20Leasing%20Plan%20-%20SEPT%202103.pdf

 

Gross leasable area: 104,439

 

Property valuation sheet: http://www.city-data.com/maricopa-county/9/91st-Avenue-16.html

 

Valuation: $7.52MM

 

Valuation/SF: $72

 

 

Now here is Basha's Thunderbird Village in Peoria, AZ: http://www.loopnet.com/Listing/17891059/7518-7586-W-Thunderbird-Rd-Peoria-AZ/

 

Total SF: 82,100

Available SF: 14,473

NNN lease rate on available SF: $18/SF/Year

 

 

If you apply 50% of the Basha lease rate to the Seritage Peoria property, it's worth $13.43MM or $129/SF at a 7% cap rate, nearly double the appraised value.

 

What would be helpful is to have the appraised value of the Basha property in order to reconcile this huge discrepancy, but I cannot seem to find it. At a minimum it demonstrates the potential value in redeveloping these properties and bringing them up to market rates.

 

Were the Seritage Peoria property to be redeveloped for $80/SF and brought up to $18 NNN/SF, at a 7% cap rate the net value would be $18.5MM, or $11MM greater than the appraised value.

[merkhet]

 

Building off of Merket's great work....

 

Here is the Peoria, AZ property info sheet from Seritage: http://www.seritage.com/portals/0/pdf/strip-centers/AZ%20Peoria%20%289406%29%20-%20STRIP%20CENTER%20Leasing%20Plan%20-%20SEPT%202103.pdf

 

Gross leasable area: 104,439

 

Property valuation sheet: http://www.city-data.com/maricopa-county/9/91st-Avenue-16.html

 

Valuation: $7.52MM

 

Valuation/SF: $72

 

 

Now here is Basha's Thunderbird Village in Peoria, AZ: http://www.loopnet.com/Listing/17891059/7518-7586-W-Thunderbird-Rd-Peoria-AZ/

 

Total SF: 82,100

Available SF: 14,473

NNN lease rate on available SF: $18/SF/Year

 

 

If you apply 50% of the Basha lease rate to the Seritage Peoria property, it's worth $13.43MM or $129/SF at a 7% cap rate, nearly double the appraised value.

 

What would be helpful is to have the appraised value of the Basha property in order to reconcile this huge discrepancy, but I cannot seem to find it. At a minimum it demonstrates the potential value in redeveloping these properties and bringing them up to market rates.

 

Were the Seritage Peoria property to be redeveloped for $80/SF and brought up to $18 NNN/SF, at a 7% cap rate the net value would be $18.5MM, or $11MM greater than the appraised value.

 

 

I found the tax assessment for the Basha property. (see attached)

 

Tax Assessed Value: $8,762,700

Basha @ $18/SF & 7% cap @ 83% occupancy: $17.4M

Basha @ $18/SF & 7% cap @ 100% occupancy: $21.1M

Basha_Thunderbird_Village.pdf

[Luke 532]

That's why you write puts that are a month or two out... write them when slightly ITM.  As long as you write them at a low enough strike, you can simply roll them forward indefinitely (and get paid to do it as long as the stock isn't extremely deep ITM at the time of roll) until the volatility sends the stock above the strike at expiration.

 

As long as the stock eventually gets above the strike you do well (doesn't really matter if it's a month from now, 6 months, or a year).  It's a nice strategy for stocks that have a margin of safety, are volatile, and trading in the lower quadrant of their 52-week range.  SHLD fits the bill.  It also pays you for waiting and, in some ways, has you hoping it stays low for awhile as you can collect more premium (and buy more shares) as you roll forward each month.

[gr33ngi4nt]

The long awaited follow up by Bishop.

 

http://seekingalpha.com/article/1900481-sears-holdings-valuation-part-two-credit-flows-for-subsidiaries-inside-a-permanently-embedded-capital-structure?source=feed

[peridotcapital]

New guy on the board.  Not an expert so maybe im missing something obvious. I’ve read the last few months of posts on Sears and I don’t get why Sears and Kmart are considered a dead retailer whose properties need to be spun off in a REIT. SHLD still does 40 Billion in sales. Net Income for the last few years has been affected by depreciation, Pensions and SYW.

 

1. Depreciation - Sears has been claiming annual depreciation of about $850-$900 Million and has Capex of $400 million which is shielding 500 million of Income. He can’t claim $900 million in depreciation forever.

 

2. Pension plans - Pension plans contribution from Sears are not going to continue forever. Pension benefits for Sears and Kmart associates were ended in 2006. Pension funding obligations were as follows 

      2006 - 828 Million,

      2007 - 959 Million

      2008 - 2057 Million

      2009 - 2227 Million

      2010 - 2493 Million

      2011 - 2990 Million

      2012 - 2475 Million

This giant increase in pension liabilities happened even though Sears Holdings contributed hundreds of million every year. All of this was caused by a drop in interest rates. When interest rates go back to normal levels the decrease in liabilities and increase in net income would be significant.

 

SHLD Annual report says the following about the effect of interest rates on Pension Liabilities.

millions                                                                              1 percentage-point Increase    1 percentage-point Decrease

Effect on interest cost component . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30                                  $ (39)

Effect on pension benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . $ (674)                                $ 814

 

 

3. Shop Your Way – I don’t see SYW as a way to clear inventory. I think Lampert is trying to set up a membership rewards club that works across retailers. In the short term it is increasing costs because of promotional activity and member redemptions. The steps I see in SYW taking and this is coming out of my magic hat but it’s what I think Lampert is aiming for.

      a. Set up a rewards program at Sears and Kmart that gives Cash back to SYW members, sign up lots of members who get used to using SYW – Step completed by Sears

      b. Have them link their Credit or Debit Card so they can earn points from other vendors – Step completed by Sears

      c. Contract with other companies to send SYW customers their way. Sears gets a percentage of sales from these other vendors and passes on most of this to SYW members for use exclusively at Sears and Kmart.

        d. Sears earns some money from other companies using SYW and also increases sales as SYW members redeem points earned from other vendors at Sears.

You can earn SYW rewards points from Burger King, Liberty Mutual insurance, Directv, Dish Network, Sprint, Avis, Budget,  ADT, Popeyes, Public Storage, 1800Flowers, and also for me 2 farmers markets. I don’t believe Sears is giving points for people to shop at or use these services without receiving anything in return.

 

Sears should report decent income when claimed Depreciation drops, Pension contributions fall because interest rates increase over the next couple of years and SYW makes money instead of the current losses or SYW just breaks even/goes away.

 

The retail business is cash flow negative on an operating basis (ex-pension). It's hard to argue that SYW is the only reason for these losses (and it will be a recurring expense). And since revenue has been, is, and will continue to decline, it's hard to argue that SYW spending has a positive ROI. If the retail business continues to get smaller every quarter, it is very difficult to project it will reach consistent profitability, even if you ignore the pension. And you didn't even factor in interest expense, which combined with capex is another $600M a year or so.

 

To be sustainable, the retail side has to somehow get to $1B of EBITDA a year (which would result in a few hundred million of annual free cash flow). That will be difficult. And to use OSTK as an example, their cash flow margins are 2%. If you assume retail revenue declines are halted at, say $30B per year (ex-Lands End this year they are ~$35B), and you also assume they can reach 2% cash flow margins as well, then you are looking at $600M of EBITDA, which is essentially cash flow breakeven. And those are optimistic assumptions, since many more stores will be closed in 2014 and beyond, and more spin-offs are possible as well.

 

[bmichaud]

 

Building off of Merket's great work....

 

Here is the Peoria, AZ property info sheet from Seritage: http://www.seritage.com/portals/0/pdf/strip-centers/AZ%20Peoria%20%289406%29%20-%20STRIP%20CENTER%20Leasing%20Plan%20-%20SEPT%202103.pdf

 

Gross leasable area: 104,439

 

Property valuation sheet: http://www.city-data.com/maricopa-county/9/91st-Avenue-16.html

 

Valuation: $7.52MM

 

Valuation/SF: $72

 

 

Now here is Basha's Thunderbird Village in Peoria, AZ: http://www.loopnet.com/Listing/17891059/7518-7586-W-Thunderbird-Rd-Peoria-AZ/

 

Total SF: 82,100

Available SF: 14,473

NNN lease rate on available SF: $18/SF/Year

 

 

If you apply 50% of the Basha lease rate to the Seritage Peoria property, it's worth $13.43MM or $129/SF at a 7% cap rate, nearly double the appraised value.

 

What would be helpful is to have the appraised value of the Basha property in order to reconcile this huge discrepancy, but I cannot seem to find it. At a minimum it demonstrates the potential value in redeveloping these properties and bringing them up to market rates.

 

Were the Seritage Peoria property to be redeveloped for $80/SF and brought up to $18 NNN/SF, at a 7% cap rate the net value would be $18.5MM, or $11MM greater than the appraised value.

 

 

I found the tax assessment for the Basha property. (see attached)

 

Tax Assessed Value: $8,762,700

Basha @ $18/SF & 7% cap @ 83% occupancy: $17.4M

Basha @ $18/SF & 7% cap @ 100% occupancy: $21.1M

 

 

Awesome! Very helpful.

 

If the 67,627 of occupied SF is rented for an average legacy lease rate of $13.50 (75% of the $18), then current NOI is ~$913K - that's a 10.4% cap rate on the $8.76MM appraised value.

 

American Realty Capital Properties (ARCP) has been buying NNN-lease properties at 6 to 8% cap rates, with only smaller portfolios toward the upper end. Using the 7% mid-point, Basha is worth $13.04MM, or ~50% more than the appraised value.

 

 

Seritage has over 200 locations and 18MM SF, which works out to ~90K SF/store. Compare this with SHLD's "core" 400 properties, which average 172K SF/store. (see attached). If you take into account the auto centers, perhaps that would bring Seritage more in line with the "core"....but my guess is that there is not much difference.

 

What I am getting at is that it would be nice to know how many of the core 400 properties are included in the Seritage portfolio.

SHLD_Real_Estate_Overview.pdf

[ScottHall]

The long awaited follow up by Bishop.

 

http://seekingalpha.com/article/1900481-sears-holdings-valuation-part-two-credit-flows-for-subsidiaries-inside-a-permanently-embedded-capital-structure?source=feed

 

That was kind of disappointing given the hype surrounding it.

[Kraven]

The long awaited follow up by Bishop.

 

http://seekingalpha.com/article/1900481-sears-holdings-valuation-part-two-credit-flows-for-subsidiaries-inside-a-permanently-embedded-capital-structure?source=feed

 

I skimmed it.  I don't know exactly what to say.  I am not sure I've seen so many words say so little.  The tone is pedantic and condescending.  The author who I think made a "name" for himself with his first article has seen his hat size expand faster than Barry Bonds' did post 1998.  He now claims to be writing a book (he mentions this it felt like dozens of times, but probably wasn't that much) detailing his Sears analysis. 

 

He says now that he has been working on Sears so long there's much more to be said than a "short" article will permit. So this article focuses solely on the liabilities.  Yet he really doesn't say anything.  He more or less simply rehashes the terms of the various liabilities and "discusses" them, but never adds any insight.  On top of this throughout he misuses terms (always the sign that someone doesn't understand the topic) and concepts.

 

But I guess to really get the full picture one will have to read the book . . . .

[hyten1]

luke writing slightly ITM puts, are you risking getting put? or is that the risk you are willing to take as long as the stock is in the low 40s?

 

hy

 

Suppose you were able to write a 5 year put on SHLD (even though you can't)...  Even though you get a strike adjustment on each spinoff, the price stability of the stock left behind (that you wrote the downside on) might get more and more crazy as increasingly (with each iterative divestiture) you own a piece of something backed mostly by the retail and less by easily identifiable non-core assets of clear value.

 

That's why you write puts that are a month or two out... write them when slightly ITM.  As long as you write them at a low enough strike, you can simply roll them forward indefinitely (and get paid to do it as long as the stock isn't extremely deep ITM at the time of roll) until the volatility sends the stock above the strike at expiration.

 

As long as the stock eventually gets above the strike you do well (doesn't really matter if it's a month from now, 6 months, or a year).  It's a nice strategy for stocks that have a margin of safety, are volatile, and trading in the lower quadrant of their 52-week range.  SHLD fits the bill.  It also pays you for waiting and, in some ways, has you hoping it stays low for awhile as you can collect more premium (and buy more shares) as you roll forward each month.