IMAX - Put Calendar

Have you watch the latest James Cameron movie? It is the 3D adventure show, Avatar. I watched it in an IMAX 3D theatre on boxing day and I was thoroughly impressed. It has continued to smash box office records and so far rallied $1.8 billion – second highest grossing movie ever made after Titanic – also a production with Cameron as director.

One company benefiting from the movie is IMAX. It has ridden this year with the market price from $4.15 to a high of $14.6. You also pay 20-25% more to see 3 D movies on a larger than normal IMAX screen.

IMAX operates in more 44 countries with 400 theatres. The company has a market cap of $900 million and sales of $145 million over the last 12 months.

10 out of 12 analysts who cover IMAX gives a buy rating. The other two are neutral. Not one analysts believes the stock is going lower.

At CES, it is receiving a lot of hype. Apple and Microsoft use the event to launch some of their most important products. It was the talk of the town.

Expectation for the stock is very high. The big question is whether the stock can meet the market expectations.

I think not. As an experienced short seller, my gut feel is that it is time to short when sentiment and expectation are at its peak. I am mildly bearish now on the stock. Let me explain why:

1. Over the last 6 months, insiders sold 288,000 shares of IMAX. I think there will be more selling over the next 12 months. The CEO and chairman plan to sell 1.62 million IMAX shares over the next 12 months.
2. It is over valued. At $14, IMAX is 35 times next year’s earnings. This is double the industrial average. It is trading at 20 times book value of 75 cents and more than 75 times cash flow. Anything more than 10 is expensive.
3. It has limited capacity ( number of theatres ) and movies line up to get the kind of expected revenue for 2010. The company needs to open more theatres. There are some potential blockbusters but no line up worthy of generating $200 m in revenue.

I decided to enter a put calendar on the trade:

BTO Jun 12.5 Put for 1.52
STO Feb 12.5 Put for 0.52

Cost : 0.9

Primary Exit : 20% ROI.

This is a trade for a slightly bearish to stagnant trend. If trade goes bearish and Feb put goes ITM, I will roll down the put or even remove the put until the stock finds support if it is moving down bearishly.

If trade goes bullish, I will roll up the put if it breaks the previous high of 14.6 and hopefully close the trade for a slight profit or breakeven.