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Pure Speculation- Sear's ($SHLD) Calls and Puts

January 23, 2012 | About:
whopper investments

whopper investments

50 followers
Here’s an idea that is completely different than any I’ve posted on the site before. It’s literally pure speculation, but a lot of people seem to enjoy that, and it’s always fun to mention and discuss.

Anyway, the idea is selling Sear’s calls. I’ve mentioned Sear’s several times before (mainly in connection with their spinoff of Orchard), and had them lined up for a “powerball“ post before the recent 60%+ run in their stock price (in two weeks!!!). I’ve also been interested in their debt, and if anyone knows of an easy way to research the debt in a company’s capital structure (without Bloomberg!) I’d be interested to hear it.

But this idea is different than all those. Sear’s stock has enjoyed a massive run up in the past few weeks on what was almost certainly a short squeeze. The company is still in a horrendous position versus its competitors, and while the stock price may prove to be too cheap at today’s levels (especially considering their real estate), it would likely take a quarter that showed some sign of stabilization and didn’t involve massive write offs before the stock could make any further moves up.

Given all that, the huge move has resulted in some ridiculous volatility on Sear’s options. The stock is currently at $47.40, and the Feb $52.50 calls trade for >$2.00 per share with the $42.50 puts trading for ~$3.75 per share. Those would imply moves of >$10% before they would even get exercised, and moves of >15% before they would prove unprofitable. Those are some HUGE moves for an option that expires in one month.

So, again, I’m not doing it. This is pure speculation, and there’s a decent chance of siginificant loss. Keep all that in mind. But if you’re feeling frisky, sell into this huge volatility premium. If you like the stock one way or another (I personally think it’s akin to a melting ice cube- currently undervalued, but losing value so quickly that it’s tough to feel comfy with it), sell the option that goes with your preferred direction. If you think it’s undervalued, sell the put. Overvalued, or only moved up on a short squeeze and headed back down in the near future? Sell some calls.

Again, no disclosure, and I won’t be joining you. Just fun food for thought.


Rating: 3.1/5 (14 votes)

Comments

dajian888
Dajian888 - 2 years ago
In a short squeeze, the stock price is not driven by value, but by supply and demand. Opinions don't matter, value doesn't matter. Playing options without a lot past experience is more likely to get hurt. I heard people talk about this might be the mother of all short squeeze, but look at the historical price of VOW.DE, you will see this is nothing comparing to that. The gain from selling a call is limited, the potential risk in a short squeeze is great. Market is far more efficient than a simple idea like this.
aintpopularbut
Aintpopularbut - 2 years ago


Is there really anyone who knows the value of Sears?

Berkowitz was buying at $100 higher than recent prices when the stock fell sharply.

Eddie has made well at any price since he got involved.

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