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Howard Hughes Is Back in the News

Howard Hughes Is Back in the News

The legendary and reclusive Howard Hughes passed away more than 40 years ago, but his legacy company recently made news.

American City Business Journals reported, The Howard Hughes Corp. has hired Centerview Partners to help the developer conduct a strategic review of its options going forward, which could include a sale of the company. The stock jumped on the news.

Howard Hughes, HHC chart

The Howard Hughes Corp. (NYSE: HHC) issued a statement [recently] from CEO David Weinreb, who said company leadership was “determined to close the significant gap between our share price and the company’s underlying net asset value.”

Options, in addition to selling the company, could include a joint venture, a spin-off of some assets, recapitalization, or a change in its corporate structure, the company said.

Weinreb noted that sales of condominiums — most, if not all are at the Ward Village properties — exceeded expectations; “however, our stock continues to languish below its net asset value per share.”

TheRealDeal reports that the Dallas-based company has been dealing with backlash over its South Street Seaport project in New York over the purchase of a neighboring parking lot that may be contaminated with mercury.

However, activist investor Bill Ackman, the company’s chairman whose Pershing Square Capital Management hedge fund is one of the largest shareholders, told investors in May that he believed the Howard Hughes stock was undervalued.

In his first-quarter investor letter, Ackman noted positive results from [a recent] Hawaii project and said that the Seaport District project represented “less than 10% of the company’s total asset base valued at cost, so we do not believe that the slower than expected stabilization of this asset is material to HHC.”

Howard Hughes has sold or was in contract to sell a total of 2,339 units in Honolulu as of April 30, and closed on $357.7 million in condo sales last year, the company told shareholders in its 2018 annual review.

In Honolulu, Howard Hughes opened its fourth mixed-use condominium, Ke Kilohana, in May. The 750-unit Aalii tower is currently under construction and has said that its sixth tower, Koula, is more than 50% pre-sold. The developer has not said when construction would begin on that tower.

The stock could now be in overbought territory and could require time to consolidate the recent gain.

HHC weekly chartA Trading Strategy To Benefit From Weakness

A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.

In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.

Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.

One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.

Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.

The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.

bear call spread

Source: The Options Industry Council

While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.

You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.

Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

A Bear Call Spread in HHC

For HHC, we could sell a July 19 $120 call for about $6.25 and buy a July 19 $125 call for about $3. This trade generates a credit of $3.25, which is the difference in the amount of premium for the call that is sold and the call.

Remember that each contract covers 100 shares, opening this position results in immediate income of $325. The credit received when the trade is opened, $325 in this case, is also the maximum potential profit on the trade.

The maximum risk on the trade is about $175. The risk can be found by subtracting the difference in the strike prices ($500 or $5.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($325).

This trade offers a potential return of about 85% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if HHC is below $120 when the options expire, a likely event given the stock’s trend.

Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $175 for this trade in HHC.