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JOSB – A High-Risk, High-Reward Trade Before Earnings

The Men's Wearhouse buyout situation puts Jos. A. Bank traders in a tricky (but manageable) situation


Jos. A Bank Clothiers (JOSB) is a prime example of how quickly fortunes can change on Wall Street. Just last month, the upscale men’s clothing retailer was backing a $48 per share a takeover bid for rival Men’s Wearhouse (MW). Now, the tables have turned, with Men’s Mearhouse rejecting Jos. A. Bank’s offer and making a counter-takeover offer of $55 per share for JOSB.

While takeovers can be risky ventures, there are plenty of potential investment opportunities for those willing to take the leap.

Currently, JOSB stock is trading at about an 11% premium to its close prior to Men’s Wearhouse’s offer, creating a nice potential profit for shareholders prior to the announcement. But, as with everything on Wall Street, the deal might not be that simple.

For one, JOSB shareholders have launched an investigation into the fairness of the potential takeover. Also, Jos. A Bank is slated to release its third-quarter earnings report ahead of the open tomorrow morning.

Currently, analysts are projecting JOSB earnings of 49 cents per share, with revenue seen coming in at $244.9 million. That said, reports that the Q3 whisper number for JOSB earnings arrives at 51 cents per share — 2 cents better than the consensus.

Elsewhere in Jos. A. Bank’s sentiment backdrop, optimism is hard to find. Ratings on JOSB stock run the gamut, with one analyst rating it “buy,” one at “hold” and the last at “sell.” The consensus 12-month price target currently rests at $51, with JOSB trading just below this price before the Men’s Wearhouse buyout offer.

Short sellers also were betting heavily against JOSB prior to the takeover offer. As of the most recent reporting period, more than 12.5% of JOSB’s float, or shares available for public trading, were sold short. The buyout offer makes life complicated for these shorts, and some covering to mitigate losses could take place over the short term, but, with plenty of arbitrage options, don’t expect JOSB to benefit from any short-covering rally with the takeover offer on the table.

Finally, options traders are also firmly lined up on the bearish side of the spectrum. JOSB’s put/call open interest ratio for the December/January series of options arrives at 1.18, with 14,183 puts open compared to 12,025 calls. Peak put open interest resides at the Dec 45 strike, with 4,247 contracts in residence, while the Dec 40 put arrives at a close second with open interest of 4,223 contracts.

On the call side, the Dec 55 strike sports open interest of 2,270 contracts, while 2,504 contracts and 2,978 contracts are open at the Jan 50 and 60 call strikes, respectively.

From a technical standpoint, JOSB stock was butting up against resistance in the $50-$51 region prior to the Men’s Wearhouse offer. The shares had been bid up following solid Black Friday sales, lending potential momentum to JOSB heading into tomorrow’s quarterly report. Without the takeover offer on the table, I might be inclined to bet bullish on JOSB prior to earnings.

While JOSB might experience some upside following a good report, unless MW lifts its bid, don’t expect the shares to go soaring higher. In fact, due to the nature of takeover offers, JOSB stock is more at risk of a potential downside move over the next month, especially if the deal falls through.

Luckily, several options strategies could allow the speculative trader to take advantage of the current situation.

With limited upside, and the potential for either stagnation or a sharp move lower, one potential strategy for JOSB would be a bear put ratio backspread. Keep in mind that options strategies are risky, so consult your broker before attempting any options trade, especially this one.

The bear put ratio backspread involves selling one or more puts while simultaneously buying 2 or more corresponding out-of-the-money puts. The ratios typically are kept at 1:2 or 2:3. The way this spread works is it allows you to collect a premium upfront, while still keeping you open to potential profit on a sharp downside move.

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For a JOSB Dec 50/55 bear put ratio backspread, you would sell one Dec 55 put while simultaneously buying two Dec 50 puts. As of the close last night, the end result of entering this spread would have been a net premium (or credit) of 40 cents, or $40 per set of contracts, which you retain as long as JOSB stock closes at or above $55. This is the most likely scenario as long as there are no issues with the MW deal.

But what if the deal falls through and JOSB sells off sharply?

Well, this spread has unlimited profit potential due to the two purchased Dec 50 puts. The first purchased put acts as a hedge to the sold Dec 55 put, while the second purchased put is the money-maker, so to speak.

That said, the trade won’t realize a profit until JOSB has sold off considerably. In fact, a maximum loss of $4.60, or $460 per set of contracts, is possible if JOSB closes at $50 when December options expire, with breakeven on a downside move arriving at $45.

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

Article printed from InvestorPlace Media,

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