Friday, January 20, 2012

Sears Holding (SHLD) - Vol and Stock Pop on Takeover Spec

SHLD is trading $49.20, up 13.49% with IV30™ up 8.96%. The LIVEVOL® Pro Summary is below.


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Sears Holdings Corporation (Holdings) is the parent company of Kmart Holding Corporation (Kmart) and Sears, Roebuck and Co. (Sears).

I found SHLD on my custom scan that hunts for IV30™ day gainers. Let's start with the news driving the vol (and stock) today and then move on to some analysis. First, a snippet from MarketWatch:

BOSTON (MarketWatch) -- Shares of Sears Holding Corp. jumped nearly 5% in early trading Friday on speculation that the financially troubled retailer might soon be taken private by majority investor Eddie Lampert.

Source: MarketWatch via Yahoo! Finance -- Sears climbs on takeover speculation, written by Val Brickates Kennedy

Well, there you go... The Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

The stock portion shows an impressive stock recovery YTD. SHLD closed at $31.78 on 12-30-2011. As of this writing, SHLD is up 54.8% for the month. But...

It's the vol portion that's fascinating to me. From the period between mid Oct to late Dec, the implied (IV30™) was trading above the short-term historical realized vol (HV20™). In the chart, it's the red line trading above the blue line.

In English, for two months SHLD options reflected greater forward looking volatility than the stock had been exhibiting over a rolling twenty day trading average.  Now, after the abrupt stock drop on 12-27-2011, the implied has been trading below the HV20™.  That forward looking "implied vol movement" was in fact realized, or in a sense, the options were "right."  While often times that's a stock drop, this time it was a stock drop and then a stock gain. Option / vega / gamma owners have profited handsomely in the last month.

Let's turn to the Skew Tab, below.

The front month (or really, front day) is crazy bid b/c of the move and news today. More importantly, though, the back two months show a nice skew shape -- normal and without any kinks.

Finally, let's turn to the Options Tab.

The ATM Feb straddle is priced at ~11.60 mid-market. Note how much more expensive the puts are than the calls. That's a helluva lot more than the $0.80 in parity -- that's a steep negative rate. In English, SHLD is hard to borrow (HTB). Any kind of stock pop like this can create greater short interest until... there can't be anymore and buy-ins can catapult the stock up. But, in order for the stock to rise, it has to fight through substantial short interest. Tricky...

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