There is no mistaking that cryptocurrencies are here to stay. The success of Bitcoin, Ethereum, Ripple and others is clearly evident — a simple glance at a price chart will confirm it. When an iconic camera company like Eastman Kodak Company (NYSE:KODK) announces that it is entering the cryptocurrencies space, however, it smacks of a sign that the mania has reached a crescendo.
The time has arrived to short the crypto craze.
On Tuesday, KODK announced plans to mint KodakCoin. The initial coin offering (ICO) will start on Jan. 31 and it will be designed to aid photographers in tracking their digital image rights.
Besides the launch of KodakCoin, the company also announced plans for Kodak KashMiner, a crytocurrency mining device, at the Las Vegas Consumer Electronics Show. The news sent Kodak shares soaring. KODK, which closed at $3.05 Monday, briefly traded over $13 yesterday before reversing to finish the day at $10.70 — a two-day gain of 250%!!
Prior to the crytocurrency news, KODK was a go nowhere stock that had fallen from grace after emerging from bankruptcy. The latest earnings report showed a loss of $1.20-per-share along with falling revenues and margins.
The Portfolio Grader gave KODK a strong sell in the latest weekly rating. So why not try a hail Mary and announce a coin offering to try and boost the share price.
To me, it looks like KODK is trying to ride the cryptocraze to glory, which is a dangerous game to play given the meteoric rise of other cryptocurrencies like Bitcoin.
A quick look at the Bitcoin chart shows just how parabolic prices have risen.
After topping at the $19,000-level, Bitcoin has pulled back sharply and it certainly has plenty of room to fall further. If it does, shares of KODK will sink along with it.
While shorting KODK outright is too risky given the volatility, options provide a defined risk way to establish a bearish short position.
With implied volatility (IV) at by far the highest level of the year (over 200% !!) buying put options is too expensive.
So, to position for the inevitable reality check in KODK, a short call credit spread trade makes the most sense.
KODK Trade Idea
Buy KODK Feb $15 calls and sell KODK Feb $12.50 calls for a 50 cents net credit
Maximum gain is $40 per spread with maximum risk of $200 per spread. Return on risk is 25%. The short $12.50 strike price provides a 16.82% upside cushion to the $10.70 closing of Kodak.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at email@example.com.