Tile Shop (TTS) - Stock Collapses on Fraud Accusations; But Order Flow May Be A Cheater of a Different Type... Fraud on a Fraud?

TTS halted trading at $12.95, down 39% with IV30™ exploding up 192.8%. The Symbol Summary is included below.


Provided by Livevol

Tile Shop Holdings, Inc. is a specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in the United States.

This is an order flow note -- pre-event order flow that may have been based on private information.  First, obviously, there is some news today.  Here is a snippet:

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Tile Shop plunges after short-seller claims profits overstated
Stone tile retailer Tile Shop Holdings (TTS) is tumbling after Gotham City Research alleged that the company has drastically overstated its profits. WHAT'S NEW: Tile Shop's 2013 earnings are overstated by over 200%, alleged Gotham City, a research firm that sells stock short. Moreover, Tile Shops' largest supplier, Beijing Pingxiu, is a related company and Tile Shop has not disclosed that relationship, according to Gotham City. The tile retailer's creditors probably won't grant it any more loans until its accounting errors are corrected, wrote the firm, which thinks Tile Shop's stock is worth just $1.54-$3.34 per share.

Source: TheFlyOnTheWall via Yahoo! Finance; Tile Shop plunges after short-seller claims profits overstated
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That is scary stuff -- an accusation of outright fraud.  Unfortunately, there may be some fraud associate with the option trades prior to this news.  A fraud into a fraud?  Well, let's not get over excited, here are the facts.

First, the Stats Tab below illustrates that TTS averages 162 total puts traded per day over the last 90 days.


Provided by Livevol


OK, next, let's look at the two-year Charts Tab, below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

We can see very easily that the stock has collapsed and the implied volatility is at totally unprecedented levels.  But that's not this story.  The story is pre-event order flow, so let's look at it remembering the average of 162 puts traded per day on average.

I have included the Options Tab from today, check out the open interest (OI) in the Dec 20 puts and the Feb 20 puts (highlighted in yellow).

Provided by Livevol

Note that the Dec 20 puts are now worth ~$7.00 and the Feb 20 puts are now worth ~$7.50.  So what?...  Here's what...

Check out the Options Montage and days largest trades from 11-12-2013, below.

Provided by Livevol

The volume in the Dec 20 puts was 1,022 (again, the total daily average volume in puts is 162).  And, though not pictured, the volume in the Feb 20 puts was 522 on an OI of 1312.  That OI rose the next day to 1,802 (which is where it sits today).

We can see the trades at the bottom of the image above -- The Dec 20 and Feb 20 puts are purchases for $1.05 and $2.00, respectively.  Further, the OI in the Feb 20 puts looks like this, by date:

11-6-2013: 155
11-7-2013: 1,040
11-12-2013: 1,312
11-14-2013: 1,802

Don't be fooled by some of the trades.  they look to the casual observer to be on the bid and therefore sales, but they are not.  Someone bid those options to $1.20 when the NBBO was $0.95 x $1.25.  that bid was hit, but that means the trade was buyer initiated.  very much the finger print of a professional trader hiding order flow (or from a less improprietous perspective, just a trader looking for a discount on some puts).

So what do we have?

A firm that averages 162 puts traded a day saw 1,488 trade on 11-14 with a large accumulation prior to that in the Feb 20 puts.  And what was the stock price when the trades happened?... How about $23...

The stock price now... How about $12.95 and halted.

This is trade analysis, not a recommendation.

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