Author Topic: Buy me Sears puts for Christmas  (Read 3256 times)

ChpBstrd

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Buy me Sears puts for Christmas
« on: November 09, 2017, 09:50:37 PM »
Sears (SHLD)
Today's price: 4.60

January 2019 put options:
Strike        Last Price
$1             $0.46
$2             $0.95
$3             $1.60
$4             $2.27
$5             $3.00

So basically the puts at a $1-3 strike price represent a double-or-nothing bet that Sears will go bankrupt, or at least be a penny stock in 14 months. Sure, there's a range of outcomes, but how many Mustachians think there's a 50/50 chance Sears will pull through with its equity intact? Seems like the odds are worse than that. This is a company with negative $1.3 billion cash flow from operations last year, whose suppliers are demanding to be paid upfront in cash, whose balance sheet shows shareholder equity of negative $3.8 billion, and whose stores are increasingly empty of inventory right before the holiday season. Their bonds yield 25%, and those debts will have to be rolled over soon.

This could be more than a fun bet with a probable(?) 100% ROI. Because the slightest recession would probably kill off Sears or at least send them to penny stock land, bets like this could help hedge a portfolio.

So buy me Sears puts for Christmas (and also let me know if any of you figure out how to give options as holiday gifts.)!

I'm also interested in your reflections on this idea - all for fun of course.

***DISCLAIMER: This is a "fun money" investment gamble only! 1% of your NW is too much to gamble in this way.***

YttriumNitrate

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Re: Buy me Sears puts for Christmas
« Reply #1 on: November 10, 2017, 05:39:38 AM »
I looked at the Sears wish book this year...wow, what a sad remnant of a long Christmas tradition. I think it maybe had four pages of toys with perhaps five toys per year. My 5-year-old self would not have been impressed.

ChpBstrd

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Re: Buy me Sears puts for Christmas
« Reply #2 on: November 10, 2017, 09:17:20 AM »
Are you familiar with what is on Sears balance sheet?  I would look into this in more depth, if you are investing serious money.  They may own or control assets well in excess of their trading price regardless of their business results for the 2 years, which could limit downside movement.  The reported negative shareholder equity can reflect massive paper balance sheet losses (e.g. of goodwill), with actual assets like real estate being held on the books at a fully depreciated values (e.g. 0).  The usefullness of balance sheet information is often ruined by complex tax minimization strategies.

So what could spoil Christmas?  A vulture capitalist looking to dismantle Sears might decide to gobble them up. Maybe unlikely (my guess is employee benefit liability is a poisoned pill),  but it is possible.

Anecdotal Evidence:  In Oakland, Uber bought the historic Sears building last year and is turning into office space.  Perhaps they can keep selling assets to fund payroll and struggle along for years.

That's the risk. It is surprising how SHLD has held on this long through financial engineering and the surprises may continue to come thanks to the amount of dumb money sloshing around. Their parasitic CEO owns/controls much of the company, and has stubbornly driven this thing into the ground. I think bankruptcy must be his end game, and he has a plan to obtain control of the unencumbered company after defaulting on the bonds and pensions.

However, there will come a point when the rate of cash bleeding will exceed Eddie Lampert's ability to raise external funds. Amazon will be destroying even the well-run physical retailers this holiday season, so Sears' much-celebrated retail real estate might not be worth what people think it is after even more empty big-box stores hit the market. Not to mention that much of Sears real estate has been transferred to an REIT (Seritage: SRT). Finally, many of the "assets" Sears owns are mall leases. Good luck figuring out what those are worth!

Financial.Velociraptor

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Re: Buy me Sears puts for Christmas
« Reply #3 on: November 10, 2017, 12:52:01 PM »
Lampert was the first hedge fund manager to earn a billion dollars in a single year.  If you are ever at a high faluting NY cocktail party and the hedgies are there, it is probable Lampert is the smartest guy in the room.  I wouldn't count him out.  Sears is probably doomed but I bet he can extract a lot of value for shareholders (especially himself) in the drawdown.  And he can keep that zombie moaning for years. 

Travis

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Re: Buy me Sears puts for Christmas
« Reply #4 on: November 10, 2017, 02:19:02 PM »
Lampert was the first hedge fund manager to earn a billion dollars in a single year.  If you are ever at a high faluting NY cocktail party and the hedgies are there, it is probable Lampert is the smartest guy in the room.  I wouldn't count him out.  Sears is probably doomed but I bet he can extract a lot of value for shareholders (especially himself) in the drawdown.  And he can keep that zombie moaning for years.

I was completely shocked to see that Montgomery Ward still exists.  It went through what is going to closely mirror Sears' near-term future, yet it still survives in some form so don't plan a funeral party for Sears just yet.

gggggg

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Re: Buy me Sears puts for Christmas
« Reply #5 on: November 10, 2017, 02:32:25 PM »
I worked for sears for about 13 years when I was younger. You could see it going downhill even back then. Oddly, my very first job there was dismantling the wishbook area/display in my store.

Financial.Velociraptor

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Re: Buy me Sears puts for Christmas
« Reply #6 on: November 10, 2017, 02:36:53 PM »
I was completely shocked to see that Montgomery Ward still exists.  It went through what is going to closely mirror Sears' near-term future, yet it still survives in some form so don't plan a funeral party for Sears just yet.

Montgomery Ward had at least a decade left in it.  General Electric owned them at the time and did some hedonistic calculus to determine they could make more money for shareholders by starving the beast of capex and milking it for cash than they could keeping it a going concern.  MW was murdered by corporate greed.  All perfectly legal.  And a bonanza for shareholders.

neil

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Re: Buy me Sears puts for Christmas
« Reply #7 on: November 10, 2017, 02:43:44 PM »
People in my family had furniture they never paid for and I'm pretty sure that debt is still active.  There was never any serious attempt to collect on any of it.  So I'm guessing a lot of customers won in the process too :P

Financial.Velociraptor

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Re: Buy me Sears puts for Christmas
« Reply #8 on: November 10, 2017, 02:49:03 PM »
I've been short (synthetic) JCP and Macy's for awhile now.  I was up 1380 bucks as of yesterday.   JCP beat estimates with a smaller than expected loss this quarter (revealed before MO) and is up about 16% on the day.  My gain is down to 876.  Macy's rallied in sympathy and now I'm only up 24 dollars on that play.

So FYI, if you short SHLD, be prepared for a miracle beat and a huge spring back as shorts scramble to cover (short squeeze).  I never opened a short in SHLD because the pricing was terrible.  BK is baked in for them into the price. 

ILikeDividends

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Re: Buy me Sears puts for Christmas
« Reply #9 on: November 10, 2017, 03:58:24 PM »
How about a calendar?

Sell the Jun '18 $3 strike to finance the Jan '19 $3 strike purchase.

If you can fill at the mid point for both contracts, you're into the trade for about 0.54 net debit.

Gives you about 7 months for the Jun '18 contract to expire OTM, then you own the Jan '18 put free and clear.  If SHLD goes as badly as you think, you could better than double your money.

You could probably shave some profits out even if SHLD plummets below the $3 strike before June, because the short contract will decay faster than the long contract, and because volatility should have a more pronounced effect on the long contract than it has on the short contract.

If the stock goes sideways for 7 months, you might also make money for the same reasons, or you'll at least have the choice of legging into another spread against your long contract.

Worst thing that happens is you lose 0.54 if SHLD lays a golden egg and surprises everyone to the upside. Beats losing $1.60 if you bought the $3 put outright in the same scenario.

Hey, you did say you wanted to gamble, right?  ;)
« Last Edit: November 10, 2017, 07:53:29 PM by ILikeDividends »

AccidentalMiser

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Re: Buy me Sears puts for Christmas
« Reply #10 on: November 10, 2017, 08:08:13 PM »
So FYI, if you short SHLD, be prepared for a miracle beat and a huge spring back as shorts scramble to cover (short squeeze).  I never opened a short in SHLD because the pricing was terrible.  BK is baked in for them into the price.

I would not short SHLD for this reason.  That's not the same risk profile as buying puts as the original author suggested.  When you buy a put, you can only lose 100% of your "investment."

ChpBstrd

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Re: Buy me Sears puts for Christmas
« Reply #11 on: November 13, 2017, 09:18:58 AM »
I understand how a short squeeze or earnings surprise could devastate a short/long put position in the span of a few weeks, but on a year's timeframe it's hard to see how Sears would surprise to the upside. They're closing several stores a day, they're increasingly unable to procure inventory, unable to borrow at rates lower than their (negative) ROA, and they probably don't have the cash for effective initiatives to change anything at this point. This strategy of shrinking only reduces cash flow / debt coverage. January would be a great time to file for bankruptcy.

Also, bankruptcy may be baked into the stock price, but I don't think it's baked into the options prices. That would be a deviation from options pricing models used by market makers, which are based more on volatility than business prospects. Looking at their operations makes me surprised that anyone (ETF investors like myself, perhaps?) is paying $4/share or buying their debt at even 25% promised returns. Circuit City had better turnaround opportunities weeks before their closure.

Yet, I hear ya on the risks of short/synthetic shorts. No "infinite loss potential" positions for me, thanks.

The rationale is that the market is offering a double-or-nothing opportunity and it's up to us to decide if SHLD's odds of a price collapse in the next 13 month are greater than 50%.