Rite Aid (RAD) must be doing something right.
RAD shares have obliterated the market this year, up 124% year-to-date. However, given the gargantuan gains shareholders have been gifted with — and the fact that earnings loom closely on the horizon (June 20) — now might be an appropriate time to harness the power of options for some good ol’ protection.
We’ll jump into the derivatives market in a moment, but first let’s see if we can’t identify why we’ve seen such a sudden explosive behavior in a staid old drugstore chain like Rite Aid.
On the fundamentals side, it appears RAD is starting to right the ship. After more than five years of losses, the company finally reported a quarterly profit of 7 cents per share in Q4 2012. And wouldn’t you know it, the sequel to the surprising return to profit was even better — 13 cents in EPS during the first quarter of this year. Needless to say, investors will be interested to see if the positive trend continues with next week’s earnings release.
Click to Enlarge The price performance and technical posture of the stock has also improved dramatically this year. Unlike its fellow competitors CVS Caremark (CVS) and Walgreens (WAG) — which have both been active participants in the ongoing stock market rally — RAD never really recovered from the horror show of 2008. It spent the majority of the past five years mired in a range between $1 and $2. Sure, its recent rise to $3 is impressive, but it’s still a far cry from its prior bull-market peak north of $6.50.
Rite Aid’s successful emergence from its multiyear range was no doubt one factor helping to propel the stock so high. We technicians like to say, “the longer the base, the higher in space,” suggesting the power of a breakout after multiple years of consolidation.
And yet despite all of the recent good fortune for RAD owners, now is not the time to rest on your laurels. Earnings announcements can be a volatile devil quick to steal shareholders’ profits. If you’re uncomfortable with risking your hard-earned gains into the main event, consider buying put options to protect your position.
If all you’re worried about is the near-term risk of next Thursday morning’s announcement, you could buy the June 3 strike put for 15 cents. The put locks in the right to sell your shares at $3, and although it expires the weekend following the announcement, it will protect you from any adverse moves throughout Thursday and Friday’s trading sessions.
You could also pony up an extra 5 cents to buy the July 3 strike put for 20 cents, which would provide an extra month of protection.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.