BROS closed on Friday, 7/18 at 64.37. The last price paid that day for 65, 8/22 calls was 5.35! Folks, that premium is an 8.3% return on the closing price of the stock! That is gangbusters for a one-month timeline.
My cost basis is lower than Friday’s closing price, so my return on the call premium would be even higher. Selling covered calls on Friday was tempting.
However, I am reminded of Skechers (SKX) in 2013. Skechers was emerging from the Shape-ups scandal at the time and the shares were undervalued. I had noticed a lot of little kids wearing Skechers. Also, Skechers was making serious inroads in the running shoe market with its midfoot strike shoes. I bought SKX shares for about 10 dollars or so.
SKX call premiums caught my eye. Speculators were willing to pay big premiums for relatively short-duration calls. I couldn’t resist. I sold calls. I made a quick, decent return, and my shares were called away. I was pleased…until I saw the shares march higher…and higher…and higher. By 2015, SKX peaked at about $50 per share. I had played not to lose, so I made some money. However, had I played to win, I would have been treated to the feast rather than settling for crumbs.
BROS is distinct from the SKX of 2013 in that BROS does not sport a low valuation. In fact, BROS sports a VERY rich valuation. However, BROS is not a a turnaround story like SKX was. BROS is an early innings growth story for which investors are willing to pay more.
In fact, generally, high premiums paid for calls is a bullish sign, whether its a turnaround story or a growth story. In theory, buyers of BROS 8/22 calls for 5.35 are arguing that 70.35 per share by 8/22 will look cheap.
At any rate, selling BROS short-duration calls is tempting. However, just as Odysseus had his crew tie him to the mast to protect him from the Sirens’ song, so shall I bind myself from the allure of selling BROS covered calls at this time. Speaking of Sirens, the Starbucks Siren ain’t enticing ’em like she used to–guess people can’t hear her while they are in their cars picking up vibes and drinks at Dutch Bros!
With Love,
P. Gustav Mueller, author of The Present