Buckle Inc. Diagonal Ratio Spread

Summary: On 10/23, I purchased a diagonal ratio call spread on Buckle Inc. (BKE), which consists of purchasing 6 in the money June 2010 25s, and selling 4 in the money December 2009 30s, for a net debit of $2900.

Break-Even Point: Break-even point is likely around 28 to 29, depending on the IV of the June calls at December expiration.

Max Profit: Maximum profit is theoretically unlimited because I am long two more June 25s, then I am short December 30s.

Potential Downside: Downside is limited to my net debit of $2900.

Greeks: Similar to my three other diagonal call spreads, delta and vega are substantial, and theta is positive, and will increase nearing expiration. See the portfolio screenshot for periodic updates as to this position's greek metrics.

Rationale: Buckle is a well managed, casual apparel, mall-based retailer. Buckle has been and is currently growing rapidly, but doing so in a principled manner and without the use of debt. EPS has grown from .86 in 2005 to 2.24 in 2009. Throughout this period, Buckle has generated substantial cash and has been a net buyer of its stock. Its five-year average revenue growth rate is 13.4%, while its five-year average EPS growth rate is 26.4%, a result of both share repurchases and margin expansion. Buckle generates terrific and peer-beating returns on assets and equity (without the use of debt). Nevertheless, the market is currently valuing Buckle's equity at historically low multiples of earnings due to the tough retail market - it's trading at around 6x EV/trailing EBITDA or 12x trailing earnings. Given management's track record and the current valuation, I am bullish on Buckle's near-term, and even more so, its long-term prospects, but appreciate the potential challenges both to its stock price and its business. This position provides some near-term downside protection and profits from time decay, while preserving upside. In the event Buckle's stock slides substantially in the near-term, I will look to gain further upside exposure.

Note that Buckle reports earnings November 17th, which will likely cause a substantial move in the stock price.