Bet on Resistance Beating Williams-Sonoma

Go long WSM puts in anticipation of a drop

There are many different forms of resistance on a chart. Resistance is an area where a stock tends to find opposition on the way up — and it has a way of changing an upward-moving stock into a downward-moving stock. Here is a trade idea that counts on one possible type of resistance to do its job.

Williams-Sonoma Inc. (WSM – $35.85): Long Puts

The trade: Buy the August 36 puts for $1.80 or less.

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MBA + CFA = Better Money Managers?

The strategy: The long put can benefit if the stock declines in value. The trade profits if the stock falls and the put premium increases to an amount more than was paid. Maximum profit is almost unlimited only because the stock can only fall to $0 (which is highly unlikely), and the maximum loss is $1.80 if WSM finishes at or above $36 at August expiration. Breakeven is $34.20 at expiration based on a $1.80 cost.

The rationale: Williams-Sonoma is a specialty retailer of home and kitchen products through its own retail stores and Pottery Barn stores. Even though first-quarter earnings announced in May beat most analysts’ expectations, the stock has not responded in a very bullish manner. Just because the fundamentals might be worthy of a price increase doesn’t mean it always happens.

Technically, the stock has been trading between about $33 and $40 the past six months. Currently, the stock is in the middle of that range. What makes this trade idea lean to the bearish side is the fact that the stock was halted by the 200-day simple moving average and proceeded to trade lower on Friday.

Taking a conservative approach to this trade idea, a continued bearish sign would be if the stock can trade below Friday’s low, which was $35.61. If it can do that, $33 is not out of the question.

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.

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