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This Options Trader Is Buying Lumber Liquidators' 'Chart From Hell'

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This Options Trader Is Buying Lumber Liquidators' 'Chart From Hell'

Phil Davis was recently a guest on #PreMarket Prep, a daily trading idea radio show hosted by Joel Elconin and Dennis Dick.

Phil Davis of Phil's Stock World was a guest on Wednesday's edition of Benzinga's #PreMarket Prep to discuss various hot topics, including Lumber Liquidators Holdings Inc (NYSE: LL), a stock which he is buying.

"When you look at Lumber Liquidators, they've got a chart from hell," Davis said. "And you would have to be insane to buy, but we are buying it."

Despite all the overhang and history surrounding the stock, Davis explained that the company's woes stem from one product it imports from China with elevated levels of formaldehyde that has been negatively linked with its consumers becoming ill. He continued that the company's formaldehyde problems were initially brought to the attention of 60 Minutes by various individuals who are short the stock who "wanted to create a story."

When the story initially broke, the stock was trading north of $60 per share, and is now trading near $14.

"If you think about logically, this wood is only 10 percent of all the wood sold by Lumber Liquidators and California is only 20 percent of the total market in the United States" Davis pointed out. "So, if you take 10 percent of 20 percent that comes out to two percent of their total sales that are affected."

Finally, Davis noted that he initially entered a position when the stock was near $25 per share by selling the 2017 $25 puts for $6.70 per option. He also added that a strategy that is available to him would be "scaling in" by further selling addition put options and not necessarily in 2017. By selling 2018 puts, the position's total cost is reduced lower.

Naturally, selling puts is a sophisticated strategy that requires stringent permission (and margin) from the brokerage firm. As such, the strategy may not be for all investors. In Davis' case, he could be obligated to purchase the stock at $25 per share.

Latest Ratings for LL

DateFirmActionFromTo
Jan 2020Morgan StanleyDowngradesOverweightUnderweight
Nov 2019Raymond JamesMaintainsOutperform
Sep 2019Raymond JamesMaintainsOutperform

View More Analyst Ratings for LL
View the Latest Analyst Ratings

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