Investors are following in the footsteps of consumers and heading to the exits in Sears Holding Corp (NASDAQ:SHLD). And in our opinion, the merchandise off and on the price chart will continue to be marked down.
For more seasoned bearish speculators, shopping in SHLD’s options for a nicely packaged spread is looking like a better kind of value bet. Let me explain.
Plain and simple, Sears is a mess everywhere and it’s very unlikely to turn around its troubles for SHLD shareholders. The latest for the hemorrhaging department store operator are growing worries over the company’s retail suppliers requiring tougher financial agreements and the likes from Sears.
Seriously, can those vendors be blamed for wanting stronger terms if they’re going to continue extending credit to Sears? I hope you know the answer to that!
With a pile of debt in excess of $4 billion and bleeding cash, SHLD stock isn’t one that’s remotely close to being a turnaround in progress. And if you’re buying what Lampert & Co. are selling, the return policy is likely to get even costlier.
I warned as much last month, and now Sears’ underlying and growing troubles are also reasserting itself on the SHLD chart — and it doesn’t look good.
SHLD Stock Weekly Chart
Click to Enlarge
When I last wrote about SHLD stock in April (and denoted by the yellow highlight), shares were in the process of breaking out of a constructive-looking consolidation pattern following a major break above a key downtrend resistance line.
Our observation was far from optimistic, though. I focused more on the fact that charts aren’t perfect. And considering the information surrounding SHLD stock, it was likely to end very poorly for investors piling in and staying the course.
Following an additional gain of around 10%, that’s exactly what’s occurred.
Sears has lost 35% from its late-April high and more than 30% below this strategist’s warning to read between the lines rather than take them at face value.
Unless you’re turning a blind eye to gauntlet of investors exiting SHLD stock, there’s little to suggest a test of the 2017 low of $5.53 won’t be challenged … and likely fail.
SHLD Bearish Spread Package
Due to the heavy short interest, Sears calls and puts are priced with a huge disparity. Calls trade artificially cheap and puts trade inflated in terms of implied volatility. But in using spreads, the trader can neutralize a good deal of the increased risk associated with simply buying puts or selling calls as a bear in Sears.
After reviewing the SHLD board and shares at $8.31, one combination that looks attractive is a modified bearish fence, which sells the June $8/$9 bear call spread and buys the June $7/$6 puts for even money or better, i.e. a credit.
What’s this do for the trader? Aside from limiting risk and improving the associated Greeks, I’d say stop right now and shop elsewhere outside of Sears … which you’re probably already doing anyway.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
