The recent jump in the price of Dish Network shares (DISH) despite poor earnings last week, can be attributed to a recent surprise court decision that could save the company as much as $400 million. The company is entangled in an ongoing series of court battles with TiVO (TIVO) over patented technology violations dating back to 2004.
Interestingly enough, Dish Network lost the 2004 case and ended up paying TiVO $100 million. While the case was active however, Dish developed new software that it claimed did not violate any copyright infringements. TiVO disagreed and once again sued Dish for an additional$200 million in contempt sanctions in 2008. Once again the courts agreed with TiVo and Dish was ordered to pay.
Most likely out of spite, Dish appealed the ruling. To investor’s surprise, the U.S. Court of Appeals decided that it would reconsider the decision previously made. While this in no way guarantees Dish will have the case overturned, it was enough to pop the stock 5% on Friday and make new 52-week highs. Unfortunately for TiVO shares slipped as much as 42% on the news on Friday.
With that said, it appears that the pop in Dish may be a bit overdone. As we said, there are no guarantees the company will win the court case. And considering Q1 2010 net profit dropped 26% year-over-year, there is really nothing that makes us bullish on the stock.
In fact, we expect the recent spike to quickly fizzle out and for the stock price to trade back down to the $21.50 area. Of course, I’ve been wrong before!
So why not initiate a trade that makes money on a nice pullback before June expiration, yet will still be profitable if price goes to the moon?! Seriously. A put ratio spread offers just that.
To review, a ratio spread involves buying a higher strike put and selling twice the lower strike puts. In our trade idea, that means buying 1 June 22 Put and selling 2 June 21 puts for a net credit of $0.15. The risk graph is as follows:
Buy +1 DISH June 22 Put and Sell -2 DISH June 21 Puts for a net credit of $0.15.
If current price at June expiration is between $22 per share and $1,000 per share (actually infinity) this position makes $15 because all the puts will expire worthless and we’ll keep the credit. If we get a pullback in the stock to the $21-$21.50 area over the next month, the position can profit as much as $114 if the stock settles around 21 at expiration. The breakeven level is the $19.85 level on the underlying stock.
Therefore, with this trade we can get paid for the chance to make 10x our money if the stock pulls back like we expect. If it sky rockets, we make $15. Of course, there is unlimited downside risk so it is advised that only traders who are comfortable with this take the trade.
