Options Forum: Martha Gets Pumped

Updated from 8:27 a.m. EST

[Editor's note: Martha Stewart was released from a federal detention center early this morning. Shares of Martha Stewart Living Omnimedia(MSO Quote) recently were trading higher by 45 cents, to $34.40, a gain of 1.33%.]

I am long two of the Martha Stewart Living(MSO Quote) September 25 puts, which I bought for $3.50. They currently trade for $4.10 or so [in late Thursday trading] despite the fact that the stock is up 70 cents to $32.74. Has there been a significant ratcheting up in the implied volatility for MSO since [Martha Stewart] gets out of prison ... or what else explains the gain on a position that would be down [Thursday], all else equal?

Thanks
Bill

Yes, the implied volatility in Martha Stewart Living options, especially the puts, has increased dramatically, basically doubling from 50% to nearly 100% over the past two weeks. This would account for the price of the put option increasing even as the price of the underlying shares also increases. What's really amazing is that implied volatility has increased across all expiration periods.

For example, on Thursday, with shares of Martha Stewart at $33.30, the April $30 straddle was trading at $7.10. That was $1.60, or 30%, higher than Wednesday's closing value. The September $30 straddle was valued around $12, a $1.50 increase from Wednesday's closing price.

This not only represents a sharp increase, but also a very unusual flattening of the skew. Also, the put options are noticeably more expensive than the calls, which indicates a stock in short supply or one in which traders must pay if they wish to borrow shares to initiate a short sale.

On Tuesday, the Martha Stewart option chain had a distinct forward skew in which the front-month options' implied volatility was markedly higher than the longer-dated options. The March at-the-money put options had an implied volatility of around 75%, while the September options had a 55% implied volatility. This is not an unusual configuration for stocks that are expected to have a sharp price move in the near term.

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