Today I sold seven August 2010 $7.5 puts on strip club operator Rick's Cabaret International, Inc. (ticker: RICK) for aggregate proceeds of $547.54. If the puts are in-the-money at August expiration, I will allow them to be exercised and will purchase the stock. If the puts expire worthless, I will have generated a 10.4% return on the reserved cash required to exercise the puts over a period of roughly a month and a half ($547.54 premium divided by $5,250 in reserved cash).
I've had a position in Rick's before, buying the stock in the $5s and down into the $3s during the height of the 2008 market crash. I then sold the stock for roughly $15.50 in March of this year (my sale price was effectively less because of covered calls I had sold against my position). The stock has since dealt with a failed acquisition of VCG Holding Corp., the only other publicly traded strip club operator, and the general market decline and the stock is back down to the mid $7s. At current prices, the stock trades at less than 10x trailing earnings (about 6-7x forward earnings) and the company has seen a considerable uptick in business over the last six months. The company generates solid cash flow (free cash flow is greater than net income due to large depreciation deductions) which it uses for other strip club acquisitions. At its core, RICK is a consolidation play, and RICK is able to purchase locally owned "mom and pop" strip clubs at very low multiples (3-4X EBITDA).
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