Explore Your Options  |  NOV 2009

Explore Your Options by Tom Gentile

Explore Your Options by Tom Gentile SHORT STOCK RISK IN CALL CALENDAR Sears Holding (Shld) was brought to my attention after Barron’s profiled the shares as being overvalued. Looking at the premiums, I noticed a distinct skew between the calls and puts. On the surface, the pricing makes the call calendar appear artificially cheap versus its put counterpart. I’m skeptical, but I’m having problems figuring out if some other factor is at work. Can you help? Great question and a hat tip for seeing potential trouble rather than establishing a position that could be riskier than it appears. I checked the option premiums in Shld and what’s being priced into the attractive-looking call calendar is a potential hard-to-borrow or threshold situation in the underlying shares. When a security becomes threatened or is in the midst of being difficult or impossible to short due to existing and heavy short interest, call prices will have a strong tendency to trade at a theoretical discount to the same strike put.

by Tom Gentile