Crox Strangle.

Crocs (CROX), a popular faddish shoe manufacturer, appears to be a good strangle strategy with options. Crox is widly popular amongst shoe consumers and can be found in most major retailers. It has expanded its product lines inking deals with Disney, Warner Brothers, and has new initiatives to delve into boots business a la Decker's (DECK). The question that lingers in this stock is whether or not it is a one hit wonder. There is much negativity regarding this stock's future ability to expand its product lines and continue to grow revenue and earnings. Competition from knock off manufacturers from far East is also a concern. The question also lingers due to this company's classfication into "fad" category. If it is a fad, it can go the way of the Razor scooters, Roller Blades, and Pet Rocks. Can this company leverage the current popularity with the consumers and delve into other diversified shoe and apparel business? The company has been very aggressive in trying to expand its offerings and maintain its appeal to the consumers. On my recent visit to Maui, virtually all the stores, concession kiosks, hotel pool desks, and even convenience stores stocked Crox, complete with matching accesories called "Widgets". There is a concern regarding oversaturation of the products into the market place and whether or not it will garner repeat business. The crox sandles and most recently, a Mary Jane knock off sandle, are the two predominant offerings. The shoes are comfortable but not that attractive, probably adding to current appeal. As far as comfort goes, it is without question. This is because of their proprietary patent protected material called Croslite, a synthetic resin that is the main stay of the company's unique position in the market place. But it will not stop the knock off manufacturers from far East from copying this design with cheaper plastic materials for less money. Already, I have seen this knock off products present in Wall Mart and other discount retailers. This will cut into margins and profits for the coming year.

Recently, Crocs announced that their new line o shoes due out this fall will feature very little of the company's main stay Croslite material, instead relegating this important piece of proprietary material to foot beds and insoles. Instead, the company seeks higher margin, high end market. But going from relatively affordable shoe product from $30 to products that are in the range of $70 to $200 will be a huge jump that may not agree with the spending taste of its customers. They are now targeting narrowly focused demographics and are encroaching onto Deckers playing field. The problem with this move is two fold. 1) Crocs is indirectly acknowledging that their Crocs clogs may not have long term growth to sustain the stock's market valuation. 2) Expanding into the realm outside of Crocs appeal, namely comfortable clogs at reasonable price that is cool and trendy, and delving into highly discerning and narrow demographics of "luxury" customers may end up decreasing margins and decreasing profits.

I do not think Crocs can win in the already crowded field of luxury shoe market. According to The Wall Street Journal, Crocs chief executive even considers the possiblity that the shoe gear manufacturer's popularity may indeed be just a fad. They are taking enormous risk at this juncture in their short life span of the company but this expansion is necessary to satisfy the Wall Street's incessant demand for growth. More ominously, the company's short position is 36.10% of the float as of January 9, 2007. The short sellers are betting that the company's heady growth days are over and the stock represents gross overvaluation relative to the growth potential. Insider selling in this company has been heavy, not the type of action you want to see, especially after robust earnings.

However, I would like to caution those who are considering shorting this stock because while this stock is over valued in relation to Deckers, Steve Madden, Nike, and other shoe manufacturers, this stock trades at forward PE of 26.65 and current ttm PE of 44.24. PEG is at reasonable 1.44 which is lower than Deckers 1.55.

On the technical front, the stock is overextended and is due for a intermediate correction, although that may not come anytime soon. It has formed a tight flag formation and has broken out of that formation in recent weeks. This type of chart formation usually is associated with robust stock price gains and is one of the most rare and popular chart pattern adored by IBD crowd. It still doesn't underscore the fact that this stock is significantly extended and needs a meaningful pull back to wash out momentum players before it can resume its next leg up, if it does come.

We will know on February 20, 2007 when they report earnings at 4:30PM. I believe a strangle strategy would be appropriate for this stock as I anticipate an explosive stock price movement either to the upside or to the down side. I would have a slight bias towards bearish case for this stock but the Strangle will allow you to make money no matter which direction this stock moves. If they beat earnings and still guides higher, we can see $65 in a matter of few weeks. I would advocate one of two strategies: March (riskier) or June options contracts. I think I will take the March 07 contracts but the chances of this stock not moving will have the potential of eliminating all of your capital, so be careful with this one. The more prudent action is in June 07 contracts but will cost more.

1. March 07 play: Buy March 60 call at 2.00 or less (10 contracts) and Buy March 55 puts 10 contracts at 3.75 or less. I don't like to play debit spreads or Butterfly because it complicates things and you stand to lose more money if all goes against you. I anticipate a profit of $11,000 on this trade if the stock goes down. If they don't meet the lofty expectations, we can expect a 15 to 20% correction, which at the current price is $46.90 to $44.13, the day after earnings. But it should settle around $42 to $40 level in few weeks before options expiration. I would advise closing out the positions first thing in the morning. Do not use market orders as the operators will just rob you. Implied volatility should be high within the first 10 minutes and let the options price settle before selling. If they blow out the numbers and guide higher, we can expect to see $65 in no time. At this juncture, the upside is $3000 profit. if the stock rises to $62 or higher. Again, take profits immediately at market open while the implied volatility is high. As you can see, this strangle strategy takes into account two assumptions. That the price will decline due to massive short position. But if you are wrong, you can still make money due to massive short squeeze that will ensue with 36%+ position. For the June 07 play, I wouldn't sell right after earnings report. I would hold on and let the technical damage continue to build upon itself. For June, I would advocate buying 10 contracts of 65 call at price below $3.00 and buying 10 contracts of June 50 puts. You have the luxury to hold on to this stock. I believe if they miss earnings, they will correct as low $42 to $38 range. If they blow out the numbers, we can surely see $65 to $70 by June. As always becareful and carefully consider your research. Be careful out there.