Sears Holding (SHLD) - Elevated Vol in Dipping HTB Stock

SHLD is trading $45.00, down 0.4% with IV30™ down 3.0% as of ~ 11:20am EST. The LIVEVOL® Pro Summary is below.

Sears Holdings Corporation (Holdings) is the parent company of Kmart Holding Corporation (Kmart) and Sears, Roebuck and Co. (Sears).

This is a vol note. With the market ripping there are plenty of names where implied is depressed to the recent and long-term historical realized vols. But, SHLD, is not one of those.

Let’s start with the Charts Tab (6 months) below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).



Check out the stock chart… yikes. On 10-27-2011 the stock closed at $82.43. In less than two months the stock is now down $37.43 or 45.4%. On the vol side, we can see the implied is elevated to the two historical realized measures. Specifically:

IV30™: 62.94
HV20: 49.19
HV180: 52.19

Given the recent stock movement, a fair question could be – is the implied elevated enough?

Let’s turn the Skew Tab.



While Feb and Mar essentially lie on top of each other, Jan is depressed to both of the back months. For the last two years, SHLD earnings have been on 2-23-2010 and 2-24-2011, so it’s fair to assume that earnings will be after the Feb expiry. But… Feb is elevated to Jan and in line with Mar. Hmmm…

Let’s turn to the Options Tab, below, and examine a common but tricky phenomenon in the options.



I wrote about this one for TheStreet.com (OptionsProfits) so no specific trade analysis here. I will remind that SHLD is hard to borrow (HTB). We have a nice and neat $45 even price in the stock as of the snapshot of these option prices. But, look at the 45 strike in Jan. The calls are priced ~$2.78 and the puts are worth ~$3.68.

Strike: $45
Stock: $45
Calls: $2.78
Puts: $3.68

Implied Stock Price = Strike + Calls – Puts
= $44.00

The future implied (forward indexed) stock price is $44 – i.e. $1 lower than today.

What rate does that imply?

Jan expiration is Jan 20 or in 31 calendar days.
So, $1/$45 annualized from 31 days to 365 becomes: (1/45)/(31/365) = 26.2%

So the stock is quoting as -26.2% in Jan. Of course, the negative rate is not fixed – it’s a stochastic process like any other process in financial markets and can be quite volatile.

HTB stocks have all sorts of added risk – heap that on top of the stock’s recent drop, and all of a sudden, short naked vol in SHLD is... very risky.  Definitely deserving of elevated vol, at the very least.

This is trade analysis, not a recommendation.