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Sears Holdings Corporation (Holdings) is the parent company of Kmart Holding Corporation (Kmart) and Sears, Roebuck and Co. (Sears).
I found SHLD on my custom scan that hunts for IV30™ day gainers. Let's start with the news driving the vol (and stock) today and then move on to some analysis. First, a snippet from MarketWatch:
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BOSTON (MarketWatch) -- Shares of Sears Holding Corp. jumped nearly 5% in early trading Friday on speculation that the financially troubled retailer might soon be taken private by majority investor Eddie Lampert.
Source: MarketWatch via Yahoo! Finance -- Sears climbs on takeover speculation, written by Val Brickates Kennedy
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Well, there you go... The Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).
The stock portion shows an impressive stock recovery YTD. SHLD closed at $31.78 on 12-30-2011. As of this writing, SHLD is up 54.8% for the month. But...
It's the vol portion that's fascinating to me. From the period between mid Oct to late Dec, the implied (IV30™) was trading above the short-term historical realized vol (HV20™). In the chart, it's the red line trading above the blue line.
In English, for two months SHLD options reflected greater forward looking volatility than the stock had been exhibiting over a rolling twenty day trading average. Now, after the abrupt stock drop on 12-27-2011, the implied has been trading below the HV20™. That forward looking "implied vol movement" was in fact realized, or in a sense, the options were "right." While often times that's a stock drop, this time it was a stock drop and then a stock gain. Option / vega / gamma owners have profited handsomely in the last month.
Let's turn to the Skew Tab, below.
The front month (or really, front day) is crazy bid b/c of the move and news today. More importantly, though, the back two months show a nice skew shape -- normal and without any kinks.
Finally, let's turn to the Options Tab.
The ATM Feb straddle is priced at ~11.60 mid-market. Note how much more expensive the puts are than the calls. That's a helluva lot more than the $0.80 in parity -- that's a steep negative rate. In English, SHLD is hard to borrow (HTB). Any kind of stock pop like this can create greater short interest until... there can't be anymore and buy-ins can catapult the stock up. But, in order for the stock to rise, it has to fight through substantial short interest. Tricky...
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