Sears Holdings: Buying a Bear at Retail

According to the US Commerce Department, October retail sales declined 2.8% for the worst since 1992 with the decline being reported as broad and consistent outside of food.

Here is a short suggestion with a defined and limited risk for the retail sector using a bear put spread.  

Sears Holdings Corporation (SHLD) 38.27 is a broad-line retailer in the United States and Canada. The company operates three businesses: Kmart, Sears Domestic, and Sears Canada.

Recently we have made several SHLD bear put spread suggestions. Our last was in IVolatility Trading Digest™ Volume 8, Issue 41, Brothers Grimm, dated October 27, 2008 when SHLD was 47.67.

SHLD came to our attention once again because of its number two position in the IVolatility.com Ranker for “Top 5 stocks based on IV Index Mean vs 30D HV,” a regular feature in the Rankers & Scanners section on our Home page. With an Implied Volatility Index Mean of 142.46 and a current Historical Volatility of 97.71 it has a positive volatility spread with an IVIndex/HV ratio of 1.46.

SHLD has broken the next lower support area at 50 and is again gaining momentum to the downside. The most recent retail sales reports are providing further justification for this short thesis. With a current Historical Volatility of 98 consider this bear put spread idea.

• Buy SHLD Dec 35 put KTQXG 5.35 IV 151.52 Delta -.3341

• Sell SHLD Dec 30 put KTQXF 3.65 IV 167.28 Delta .2329

    Debit 1.70 Position net delta -.1012

The risk is defined by the debit amount in this case it would be $170 dollars for a one-lot position. In addition, the risk is limited to the debit. The potential gain is the difference between the strike prices less the debit or $330. Depending upon how fast SHLD continues to decline the return on investment could be very high

The above indicated debit is based upon Friday’s middle closing prices between the bid and ask. The debit on Monday should be 1.68 if the stock price remains unchanged. Use the position net delta shown above to adjust for any price change.   For example, if SHLD is trading Monday one point lower then spread should be trading about 1.78, or about .10 higher.

In the unlikely event retail sentiment should improve we suggest using a SU (Stop/Unwind) at a close above the last pivot at 50. 

Disclosure: no positions