One Earnings Report Restored RH Stock’s Old Glory — Short It!

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RH (NYSE:RH) is now up over 240% year-to-date so my attempt at a cautious bearish trade should not shock anyone. Shorting a stock outright can be financial suicide because it has unlimited risk.

RH Stock: One Earnings Report Restored RH Stock's Old Glory -- Short It!

When I buy a stock, I risk 100% of my money. The worst-case scenario is that the stock goes to zero. But when I sell a stock short, my losses would accumulate for as long as the stock is rising, no matter how high it goes.

So today, instead of doing that outright, I will use RH options to bet bearish on a stock that rallied too far too fast.

Now, before you send me hate mail, know that I will use the perceived value in RH to accomplish my short without any money out of pocket.

Fundamentally, RH is definitely not cheap as it runs red. Gross margins are decent but not much of it flows to the bottom line. Its price to book value is under four and this gives me some confidence that it would be okay to own the shares but at a discount from here. This is important to the way I will finance this bearish bet.

Technically, there is not much to discern for the recent rising wedge other than it leaves the bulls vulnerable to a break in the trend line. But the long term chart shows that it took RH stock two years to recover from a hideous decline that started in November of 2015 when the stock fell 70%.

When a stock takes its time to form a long term rounding bottom and it breaks through the crime scene, it usually bursts through it for new highs. Apple Inc. (NASDAQ:AAPL) did it after the 40% dip in 2012 and again after a 30% dip in 2015.

But in RH stock case, the dip was so deep that there is the chance that those who were caught long in 2015 may want out close to even.


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With today’s trade I am not dissing the company’s prospects in general. I am merely shorting the recent price action as one that I deem too excessive for now.

RH Stock Trade Idea

The Bearish Bet: Buy RH Dec $100/$97.50 debit put spread for 50 cents, where I need price to fall through my spread to profit. This is the most I could lose for a chance to more than triple my money.

To mitigate my out-of-pocket expense, I will completely finance the bet by selling downside risk into recent support.

The Bank: Sell the RH Jan $80 naked put. This is a bullish trade for which I collect $2 to open. If price stays above my strike then I keep my entire premium.

Taking both trades results in a $1.50 net credit so I am already a winner. And if price stays above the puts I sold then any premium I reclaim from closing the bearish bet would be incremental profit. Even if that premium is less than what I originally paid.

Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose

Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/rh-stock-old-glory/.

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