Explore Your Options by Tom Gentile
SHORT STOCK RISK IN CALL CALENDAR
Sears Holding (Shld) was brought to my attention after Barronís 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. Iím skeptical, but Iím 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 whatís 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.