Overstock.com Inc (NASDAQ:OSTK) reported earnings last night, and it was ugly. So understandably investors are punishing the stock by selling it down 15% this morning. This move erases much of the rally that the stock has enjoyed since last October.
In addition to bad operational results in its core e-tail business, OSTK management said that they will have complications with their cryptocurrency offering due to the ongoing Securities and Exchange Commission investigation. This is the major problem for the stock here since for a while now, Overstock stock has been tightly tied to the cryptotrade — mainly Bitcoin.
The concept of cryptocurrency is new enough that it’s fleeting to most investors, but consensus has been that there is plenty of profits to be had. So when OSTK announced their involvement in the field, Wall Street enthusiasm in its stock grew large. Perhaps too large too fast off this golden goose.
Before their tie into the cryptotrade, Overstock’s business was ailing at best. They are in the direct line of fire from the Amazon.com, Inc. (NASDAQ:AMZN) effect. Last night’s headlines put serious doubt over the future success of the company.
Today, I want to add a speculative bullish Overstock trade in a conservative portfolio. This is money I am willing to lose on a calculated risk. No, I am not daring enough to buy the shares outright. This would put my money at risk with no room for error. I don’t do that on speculation. Since this is not Apple Inc. (NASDAQ:AAPL), I will use options instead.
Thanks to a big down day move and still elevated levels of the CBOE Volatility Index, put premiums are ginormous. And therein lies my opportunity.
Click to Enlarge I want to sell downside risk against a level that I believe will hold. Else, I will own the shares lower and would need to manage out of them without major damage. This is a chance to create income without any immediate out-of-pocket expense.
Fundamentally, the picture is bleak. This is a pure trade off the price action and Wall Street emotions. To be as safe as possible, I chose my risk levels to be those of last September price ranges. Moves this big are often more than one day events.
What makes matters worse is that the OSTK stock is tightly tied to the performance of Bitcoin. And unfortunately of late that has also been under bearish fire. This makes OSTK’s crisis even more difficult.
Overstock Stock Trade Idea
The Bet: Sell the OSTK APR $25 put and collect 75 cents per contract to open. Here I have a 85% theoretical chances that the price will stay above my level. Else, I will accrue losses below $24.25.
Selling naked puts carries big risk, especially for a stock as frothy as OSTK. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the OSTK APR $30/$25 credit put spread, which would deliver over 15% in yield but with much smaller risk. Both set ups have about the same odds of success and neither require a rally to win.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free here. 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 as @racernic on twitter and stocktwits.
