Dad’s Dollar Diary #6: Still Wussing About Sears Shorts

sears-one carDear Diary,

This is a follow-up to my post Sears Is Taking It in the Shorts and the trades I made recently to short the stock via put options. My trades and comments are now being updated on the Dad’s Investment Journal page.

June 6, 2016: We posted our short thesis on SHLD. However, we are on record of taking a “wuss” position by not actually making any trades. Instead, we were just sitting on the sidelines and waiting on the right price to make our moves.

July 21, 2016 (PUT SEARS HOLDINGS CORP $13 EXP 01/19/18 and PUT SEARS HOLDINGS CORP $5 EXP 01/19/18): After trading in the $12-$15 range for a while, Sears finally popped up around $15.50, which was my target to initiate a short position with long duration January 2018 puts (I think Sears will go BK by then). I did a put spread to reduce my costs (bought $13 for $4.58/share and sold $5 calls for $0.92/share = net cost of $3.66/share). I will look to buy more puts as well as close out the $5 puts if SHLD goes up to $18. Buying back the $5 puts will then remove the profit limit for my initial put position.

August 9, 2016 (PUT SEARS HOLDINGS CORP $10 EXP 01/19/18): Sears continued climbing to $16.79, so I added to my short position by buying long duration January 2018 $10 puts at $2.29/share.

August 12, 2016 (PUT SEARS HOLDINGS CORP $18 EXP 09/16/16 and PUT SEARS HOLDINGS CORP $15 EXP 09/16/16, PUT SEARS HOLDINGS CORP $18 EXP 09/16/16, and PUT SEARS HOLDINGS CORP $13 EXP 01/19/18): Sears continued climbing to $17.59, so I again added to my short position. I bought a short duration September 16, 2016 put spread: I bought $18 puts at $1.72/share and sold $15 puts at $0.47/share for a net debit of $1.25/share. I bought these shorter-term puts because I’m looking for SHLD to drop after they release earnings on August 25. While the put spread limits my profit potential, I wanted to reduce my costs/risk because of the short duration of the options (the puts would only have three weeks to come into the money after the earnings release). I also added to a longer-term short position by buying January 2018 $13 puts at $3.60/share. To me, the long duration was, in itself, a risk mitigator, so I did not offset it by selling lower strike put options. I want to retain as much of the upside as possible. I also bought short duration September 16, 2016 $17 puts at $1.12/share in my IRA account. I could not offset the risk because I currently cannot sell options from my IRA account even though it is part of a spread. But I was comfortable with the risk-reward based on my investment thesis.

August 24, 2016 (SHLD) Part a: Sears dropped down to $14.70, so I considered closing out of my September 16, 2016 $18-$15 put spread ahead of earnings because my upside was capped by the $15 puts I sold–I could only make $3/share ($18.00 – $15.00) max. However, when I looked at the option prices, the spread was only $2.40/share versus the $3.00/share I expected. Looking at it more closely, my far ITM $18 puts are valued almost entirely on their intrinsic value ($18.00 – $14.70 = $3.30) with only a small portion for its time value ($0.27), whereas my near ITM $15 puts are mostly time value ($1.12) with a small intrinsic value ($0.30). What that means is that I have to take a lower return now to lock it up, or wait until it gets closer to expiration where most of the time value is lost, or for the stock price to drop even further where the $15 puts are also way in the money (and, hence, will have a small time value). So I will wait it out because I think SHLD will drop given time and especially after the dismal earnings they will release.

August 24, 2016 (SHLD) Part b: Sears has been coming down off its temporary blip up to the high $17’s. I was thinking about how I should have made a bigger investment in this position. A larger short position would help me better hedge my overall stock portfolio with respect to a market correction when the Fed raises interest rates this fall. So I still feel like a wuss for not having greater conviction in my SHLD trades. I will look to add more to my put positions if SHLD comes back up towards $18. I expect this to be a bumpy ride, so hopefully I will get another few bites at the apple.