Hi, Steven:

How does someone trade a "hard-to-borrow" stock like Taser International (TASR) when there are no options on it? Why do some stocks not have options? Thank you,


My personal reply to the reader's first question, which I received a couple of months ago, was a succinct "Very carefully," and included a link to this article , which explains the general process for listing options as recommended by the Securities and Exchange Commission. Implicit in the reader's question is an apparent desire to sell short or establish a bearish position on the stun-gun stock.

However, since that question was received, a lot has changed. Taser shares have climbed about $35, or 85%, to the $80 range and now have listed options (they began trading on March 19). It now seems appropriate that I should amend my initial response to "Very, very, very carefully."

While the addition of options provides a means to short the stock, Taser shares are still in short supply and extremely difficult to borrow. The influence of the tight supply/demand for the shares manifests itself in the options market in a variety of ways.

The first thing to notice is the robust activity: The options are trading an average of nearly 5,000 contracts a day, and the April series has open interest of some 31,000 contracts. These are impressive numbers to rack up in just the first two weeks of listing.

But it's not really a surprise, because trading in Taser's stock has averaged 10 million shares a day over the last month. This is despite the fact that its total float is just 9 million shares, meaning each share available to trade turns over every day. So until Taser can issue more stock, options provide a nice alternative for making a two-sided market. This is crucial for a stock that has tremendous short interest both in real terms (as of March 8, there were 3.7 million shares, or 40% of the float shorted) and desired intentions.

But it doesn't make it any less treacherous or diminish the possibility of ever-rising prices and sporadic short squeezes. The risk involved in trading Taser is abundantly evident in the sky-high implied volatility of its options, which is in the 90% range. The high levels are due not only to the fact that Taser shares can swing $10 on any given day, but also because of the huge demand for puts, which of course drives up options prices beyond the statistically relevant real, or actual, volatility of the underlying shares.

Comparing the prices of the April at-the-money strikes shows that a huge premium is being paid for put options. On Friday, with Taser trading at $85, the April $85 call was trading at $5.60, giving it an implied volatility of about 80%. Meanwhile, the April $85 puts were valued at $6.60 for an implied volatility of around 95%. This is one of the most extreme examples of the put/call price mismatch that I've seen in a long time -- especially for a stock that has done nothing but go up over the last year and pays no dividend.

"The inability to borrow stock has a direct and measurable impact of driving up the price of its put options," said Dan Hough, an options strategist with PTI Securities.

Now, before you start salivating at the prospect of selling calls as a way to get short Taser shares (with a nice $6 price cushion), be aware of some pitfalls. While most clearing firms will have some access to shares, the pecking order of who gets to borrow them puts retail investors at the bottom. This means that if the calls move into the money as expiration approaches, your firm may let you know (nicely, at first) that you should be prepared to buy Taser stock in the open market to make good on delivery should the calls be assigned. As noted, the price paid can vary widely on a daily basis and can be substantially higher than anticipated.

Assume you hold the short call position until expiration and you get assigned (the clearing firm will notify you that Saturday), forcing you to buy shares on the following Monday. This leaves you exposed to the stock opening sharply higher and you can incur a large loss. While it's not a common practice, the firm may even take the liberty of "buying you in" on their own. As Hough explained, "We would give the customer early notification and every opportunity to square the position on his own. It tends to make customers angry when you force trades through their account, but if someone is trying to hide behind a three-day settlement rule and the margin requirement demands action, we do have the right to take action."

While the listing of options provides some new trading opportunities in this hot stock, remember the old maxim: When implied volatility levels are high, there is usually a good reason.


Thanks for the suggestion in your article the other day for buying the April 88 TLT (iShares Lehman 20+ Year Treasury Bond Fund (TLT)) options ... that was a very nice 3-bagger!


You're welcome. I can't take credit for the huge jobs number, but I was glad to hear from many of you that employed some form of the suggested TLT option strategy that capitalized on the sharp decline in bond prices. It's nice when you get an immediate and large payout, but keep in mind the other message of the column: Always look for strategies that minimize risk before searching for big profits. And enjoy.
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.