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Lumber Liquidaters

Lumber Liquidaters

Lumber Liquidators is an American retailer of hardwood flooring. Lately 60 minutes have done a reportage about their products containing formaldehyde. This has caused their stock to plummet and is now hovering around 33.85 \$. Charlie Ledley and Jamie Mai were interested in a company once that was in a similar situation and they said that the stock price is incorrect. Either the company is fine and the stock price should be valued at its original price or 60 minutes are right and the stock should be worthless. Right now Lumber Liquidators are in a similar situation were the stock price is incorrect, it should not float around a price in between the correct one, which means there is a possibility to do the same thing as Charlie Ledley and Jamie Mai.

A,

Strike price: 70\$

Stock price: 33.85 \$

Pay of: 32.05 \$

(70 - 4.1 - 33.98)/ (33.98 - 4.1) = 83 %

B,

Strike price: 18 \$

Stock Price: 33.85 \$

Premium: 3.8\$ -->100 shares = 380 \$

Pay of: 12.05 --> 1205 \$

C,

You could do like Charlie Ledley and Jamie Mai, they pretended to be business men interested in a company that was in the same situation as Lumber Liquidators. They would set up meetings with the president and the board members of the company. By doing this they managed to get a good look at the inside of the company that they were investigating and came up with that the company was perfectly fine, so they would go out and buy call options to make money on the rising stock price.

D,

1000/4.10= 243.9 --> 243*32.05 = 7788.15 \$

1000/3.8= 263 --> 263*12.05 = 3171 \$

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.