Now that Lumber Liquidators (LL) is trading again, there is an enjoyable stock to follow if you like the volatility thing. LL was hammered Sunday night with a 60 Minutes negative news story. Although LL had disclosed the story was coming, it really painted the company in a light far more negative than even the most bullish folks anticipated.
I really thought this would be a case of the market overpricing to the downside, then the stock seeing a small relief rally after a down opening. Now that the stock is no longer halted, we've seen so far only a minor bounce with the stock still down some $11. The lowest dip I caught in the pre-market trading was in the $37.75 area, so that is a focus for me.
The company did request a halt this morning, so it could respond to the 60 Minutes report. Thus far it has done little to help the stock. This type of overhang, especially after disappointing earnings, does not dissipate quickly. Add some very influential and deep-pocketed short sellers and it is clear LL has a big fight on its hands.
Even if the company has followed all the guidelines, we can now expect a drag on future earnings from at least two sources: legal costs and reputation costs. The legal costs can be somewhat quantified, if the company has done nothing wrong. If it has, the liability costs will be destructive.
But once the masses get wind of this story, assuming they do, how many are going to choose to go somewhere else other than LL. I would imagine the marketing costs will ramp for LL and we'll see some additional incentives or discounts to get folks back in the door.
I find selling puts here difficult. Until the story clears more, I have little interest in getting involved for the long term. That's what you have to be willing to do when selling puts here for any good amount of premium.
If there were some $25 or $30 strikes in the front months, then I might have some interest, given the additional safety net those offer. But with March $35's being the lowest out there in the short term now, I am inclined to wait another day or two to see if new strikes open. Overall, I don't see how there is any way to call the company cheap right now.
If I wanted a longer-term play, then I would define my risk and simply use an out-of-the-money call spread like an August $50-60 call spread for $2.00 or less. If you are playing this one, then you are likely playing their "innocence". And if that's true, then one could expect a big rebound. This approach would at least limit risk and provide time for the trade to work.
The options market is still pricing a nearly $7.50 move by this month's expiration, so there is no expectation volatility will cease any time soon. If you believe selling premium today will bring you a big score by Tuesday or Wednesday, then I would suggest you re-examine your trading thesis.
There are only two trades I would consider if I were bullish. One would be a collar using the $35 put and $45 call strikes -- or some slight derivation from that. The other would be a spread, preferably vertical or diagonal. I somewhat favor a diagonal spread here given the very high IV and the theta which will begin to kick in on the March calls soon enough.
My original thought had been to do a long April $40 call, long March $40 call and short 2 March $45 calls for between $5.50 and $6.00. I've done this one in small fashion at $5.75.
The April call trades there now. Even if LL stays relatively unchanged, then this position should at least hold its value come March expiration. If the stock started to fall, I wouldn't even bother with a repair and simply take the loss if we see a close under $37.75.
I would be cautious overall with this one and certainly look to limit or define your risk.
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