If you’re not buying what Sears Holdings Corp (NASDAQ:SHLD) is selling, you’re in good company. But even the sizable bear crowd will find that going short SHLD stock is wrought with peril.
But there has to be at least one good way to wring a profit out of deeply unprofitable Sears, right?
Unless you’ve been locked in a cryo-chamber, you’re well-aware that many brick-and-mortar retailers on life support. Nowhere is this more apparent than department store giant Sears — a company firmly on the path to bankruptcy.
Sears’ demise may not happen tomorrow or even this year, but facts are facts. All the cost cutting in the world, restructuring and sales key assets like Land’s End (NASDAQ:LE) or Craftsman and underperforming real estate aren’t going to resuscitate SHLD stock.
Sears has lost more than $10 billion over the past few years, and it continues to get worse. If there ever was an opportunity to rebrand and re-invent itself, Sears kissed it goodbye long ago, ceding itself to the likes of e-commerce goliath Amazon.com, Inc. (NASDAQ:AMZN).
So, why have insiders CEO Eddie Lampert and Fairholme Capital Management boosted their equity stakes in Sears stock in recent weeks? Why, right after the company acknowledged there exists “substantial doubt” in Sears’ ability to continue as an ongoing entity?
The “aggressive” buying in SHLD stock likely has much to do with larger and costlier stakes as company creditors, preventing a collapse in share price from negatively impacting the pair’s broader interests tied to Sears.
Lampert’s ~525,000 Sears shares bought around $8 each between March 22 and March 24 amounts to a roughly $4.25 million. That’s a nice chunk of money, but not much considering his $3.1 billion net worth.
Don’t buy alongside Eddie and Fairholme.
SHLD Stock Chart
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Technically speaking, the move late last month was strong enough to break a fairly major downtrend resistance line and put Sears stock above its 200-day simple moving average for the first time in nearly two years.
Also, a tight lateral consolidation of roughly two weeks long has found support from the key long-term moving average, allowing SHLD to digest its gains in a constructive matter.
That’s bullish, right?
Given the technical evidence, you’d want to say yes. But when something looks too good to be true, it probably is. Plus, SHLD stock still has to contend with a massive bear population and a dismal financial situation. Charts aren’t everything, you know.
How to Trade Sears Stock Right Now
Right now, Sears’ calls and puts are priced at a huge disparity. Calls are artificially cheap, while puts are trading inflated in terms of implied volatility.
In a nutshell, the difference in pricing in SHLD options boils down to the ability to borrow or not borrow shares, being called on one’s short and the interest those shorts have to pay, not receive, to position as bears.
As this all relates to positioning, I’ll leave that up to the individual.
- Bulls: Buy out-of-the-money long calls. (Though they’re still highly speculative.)
- Bears: I would suggest a vertical spread. But be warned, reasonably priced limit orders are unlikely to find the other side of the position.
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.
