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)
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) 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.
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.
Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to
steve.smith@thestreet.com.