Options Forum: Martha Gets Pumped

Typically, a sharp increase in implied volatility will be confined to nearer-term options because of an expected price-moving event.

But on Thursday the March, April and September $30 puts all had an implied volatility near the 100% level. A flattening of a skew usually occurs during a decline in implied volatility, as the short-term uncertainty about the stock price dissipates in the wake of an event or price move.

The fact that implied volatility has increased across all expiration periods seems to be the result of two factors. First and foremost, Martha Stewart shares are hard to borrow, meaning those who are or want to be short stock are buying options to cover or establish a bearish position.

Second, there are expectations for increased volatility in Martha Stewart's stock price for the foreseeable future. Both cause an increase in demand for options, which drives up the price and by definition causes an increase in the implied volatility.

The fact that the implied volatility has spread across many expiration months seems to indicate that the short squeeze and volatile trading may persist beyond Martha's release.