Two very hot story stocks this month have been
(JCP). Both have news headlines every day as the companies struggle to find something transformational that can revive their earnings.
JCP shares slid into the low $12 range into the big liquidation by activist Ackman and then bounced as high as $14 as optimism grew that the new (old) CEO could turn things around. That buzz seemed to pass quickly and shares dipped below $10 this week while put volume and implied volatility have exploded. More than 28,000 January 5 strike puts have been opened this week, suggesting a very dire outlook for the retailer. One simple way to think of this type of option flow is Professor Peter Carr's "DOOM" (Deep-Out-Of-the-Money) put metric. I worked with Peter for years and while 90% of his quantitative modeling was over my head, this idea is very simple: take the price paid for a far downside put as a proxy for the probability of default by expiry. On a $10 stock this means a $5 put bought for $1 (that's what someone paid for the JCP January15 5 puts yesterday) implies a 25% chance of default- since the $1 would pay off with $4 in profits if JCP share price went to zero.
Another way to see the dire concern is in a sharply increasing implied volatility and put/call skew- basically implying a fat-downside-tail to the probability distribution for the options- JCP skew in the October options is very steep- with puts about 16 IV points above calls.
This type of dire concern can create a death spiral as the company loses credibility with lenders and vendors, and business costs start to spiral upward. While it's still possible the some sort of white-knight comes along to take JCP private or otherwise revive the business, the options flow suggests more of a view to the downside- and with ATMIV near 91% we can expect plenty of 5% daily swings to keep traders on their toes.
OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits
Henry can be followed on Twitter at twitter.com/OptionAlert
EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stocks Under $10 that he thinks could potentially double. See what he's trading today with a 14-day FREE pass.
Select the service that is right for you!COMPARE ALL SERVICES
- $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
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV