Sears Holdings Corp (NASDAQ:SHLD) could be the retail sector poster child of the Amazon.com, Inc. (NASDAQ:AMZN) victims. Media experts sometimes refer to the Amazon effect as recent, and those experts are wrong. The Amazon story has been going on for a decade. The SPDR S&P Retail (ETF) (NYSEARCA:XRT) stock action is proof enough that the retail sector as a whole chose to ignore the danger until it was evident on their P&Ls, though SHLD stock is the most glowing example.
Although Sears management wasn’t alone in making this mistake, SHLD shares have suffered far more severely than the ETF.
Today, though, Sears stock is enjoying a nice spike on some short covering as Sears robs Peter to pay Paul. I think I’ll bet against it.
Fundamentally, Sears is on life support. Yes, SHLD stock enjoys a spike from time to time, but that’s usually associated with jolts from asset sales — the likely driver of this recent rally. All of them turned out to be short opportunities.
Thus, spikes aren’t breaths of fresh air — they’re dying gasps.
Technically, this latest bump in Sears shares is a measured move that could have some more upside. Still, I want to short it — cautiously. Instead of selling the stock outright and be open to unlimited risk, I’m going to use SHLD options.
How to Trade SHLD Stock Here
The bet: Buy the Apr $9 put for $1.10. This is my maximum potential loss. I need Sears to fall through my strike price before mid-April for the trade to be a success.
I would normally finance my debit bets by selling risk against value. But in the case of SHLD stock, I don’t have faith in its value. So instead, I will sell limited risk, not naked puts.
The bank: Sell the Jun $4/$5 credit put spread for 20 cents per contract. With the current 40% buffer, this trade has an 80% theoretical chance of success. For this one to win, I need Sears to stay above $5 — thus, the stock would need to set new lows.
If I take both trades, that means I’m shorting SHLD stock for free. As long as it stays above my sold put spread, any premium I recapture from selling the debit puts would be pure profit.
I am not required to hold my trades open through expiration. I can close them at any time for partial gains or losses.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
