Skip to main content

Morning Update

Yesterday there was unusual options activity in Sears Holdings. One traded made a large bullish bet on the long term performance of the stock by buying 10,000 January 2015 60/70 call spreads for a net debit of $2.50. This trade will profit if SHLD is above 62.50 in two years, and can return a total of $7.50 is SHLD is at or above 70 at expiration. The total risk is limited to $2.50 if SHLD is below 62.50, meaning that this trade has the potential to return 300% on investment. However, this definitely a speculative play considering that SHLD was trading 47.30 at the time of the trade which means the stock would have to rise 32% for this trade to be profitable.

The problem is that Sear’s is not a profitable company and does not expect to be anytime soon, which makes a 32% rally in the stock unlikely without a major change. Since its merger with Kmart in 2005 Sears has seen revenues and profitability decline. Free cash flow has been negative since 2010, and consensus expectations are for the losses to continue through fiscal 2015. CEO Lou D’Ambrosio was leading the turnaround attempt and made progress last year with the closure of 100 unprofitable stores and the spinoff of Sear’s Outlets. However he recently announced that he would be stepping down and will be replaced by Chairman of the Board Edward Lampert. This abrupt leadership change could stall the momentum the Sears turnaround recently gained and increases uncertainty over the company’s future.

Next Thursday Sears will report earnings, which will be the most important near term catalyst for the stock. It will also give the new CEO a chance to speak to investors and explain what the company’s strategy will be going forward. To put this trade on you must believe in Sears management and that they will return the company to profitability. Recent 13F’s show that the Fairholme Fund’s Bruce Berkowitz added to their long position in Sears, showing that there are believers out there.

Comments

Post a Comment

Popular posts from this blog

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower.  (Source: Access Hollywood) Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007).  So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. A...
Post a Comment
Read more

Morning Update

ECB officials said last night that ECB President Mario Draghi will likely wait to hear Germany’s Constitutional Court’s ruling on the EFSM before publicly unveiling his plans. Many were hoping Draghi would unveil his plan after the ECB’s September 6th meeting, but this is becoming increasingly unlikely. Today Reuters is reporting that Germany is the latest European nation to begin studying the possible impact of a Greek exit from the Euro. This comes ahead of Chancellor Merkel’s meeting with Greece’s Prime Minister today. Merkel has repeatedly said that she would like Greece to remain in the common currency, though clearly someone in Germany believes a Greek exit is possible outcome worth preparing for. This morning US new durable goods orders numbers we released for July, coming in at a gain of 4.2% M/M. Though this was strong than expected, it was primarily driven by strong aircraft sales. Non-defense orders excluding aircraft were down a sharp 3.4% M/M versus a 0.2% decline expecte...
Post a Comment
Read more

Morning Update

Last night rumors that a Spanish bailout would occur in the near future strengthened, tightening Spanish and Italian bond yields to bunds. Even after the rumors that Spain would seek a bailout this weekend we denied risk-on sentiment remained. The Euro is now trading near the psychologically important 1.30 level and US equities are pointing towards a higher open. Yesterday the market also looked strong early on but gave back nearly all of its gains by the close. A strong close higher today will take some momentum back from the bears, while another reversal will only encourage more near-term selling. Yesterday we noticed unusual options activity in Best Buy. Someone sold 22,500 BBY Oct. 19 calls for $0.25 and bought 15,000 Nov. 19 calls for $0.90. This trade appears to be someone rolling their long Oct. calls forward into November. The Nov. calls will turn a profit if the stock is above 19.90 at expiration, which would require a 17% move from yesterday’s close. Best Buy has seen de...
Post a Comment
Read more