In short, if SHZ is committing fraud as per the Absaroka allegations, they are doing a very poor job at it. Typically, fraudulent companies will inflate their revenues and deflate their expenses, trying to manufacture profits so they can raise money from U.S. investors. In the case of SHZ, its profit and loss is already so consistently dismal that I find it hard to believe the company is committing much fraud.
When the price recently jumped from below $4 to around $6.50, I jumped in to short SHZ again, but this time in a different way. I sold 1,000 $7.50 strike calls (i.e. well out of the money) at a price of $0.40, netting me $40,000 and my only risk was that the price would jump above $7.90 in the very short term. It was a no-brainer. I wanted to do a larger trade, but the price dropped quickly and the silly bid at $0.40 evaporated quickly. Unfortunately, shortly thereafter, all of the brokers increased their margin requirements on Chinese RTO stocks, including the requirement on naked calls. The stock fell to $4.50 and my broker required that I keep $450,000 as margin requirement against this position, so in terms of return on capital, it was not so great and I ultimately repurchased the calls at $0.10, so I only netted $35,000.
In retrospect, had I sold 1,000 in-the-money calls, I would have captured the entire $2 move and made $200,000 and the margin requirement would have been essentially the same.
As a result, this time I decided to take advantage of this latest pop to sell $2.50 strike calls (i.e. deep in the money). Because the options are deep in the money, this trade performs exactly like shorting the stock, but with the advantage that if the stock is halted (due to fraud or other concerns) the options simply expire worthless and I keep all of the premium received.Once again, with performance this dismal, I don't think the company is committing a significant amount of fraud. If they are, they certainly are not doing it very well. I do note, however, that immediately after the fraud allegations were released, the CFO resigned "for personal reasons" and the company appointed a 29-year-old recent college graduate to take his place.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV