IB Options Brief: Crocs, Inc. (CROX) & Sears Holdings Corp. (SHLD)

Posted October 18th, 2011 by Caitlin Duffy in Unusual Activity

Crocs, Inc. Options Active As Shares Tank

CROX ñ Crocs, Inc.
Lower-than-expected third- and fourth-quarter sales guidance from the maker of plastic clogs trounced shares in Crocs, Inc. today, roughly two weeks before the companyís official third-quarter earnings release on November 3. Shares in CROX plunged 39.15% to as low as $16.21 this morning. Options on Crocs are changing hands at a fairly rapid clip, with trading in calls outpacing that in puts by more than 3-to-1. Trading in CROX calls appears somewhat mixed. It looks like some strategists are buying call options to get ahead of any potential rebound in the price of the underlying should selling pressure ease up ahead of October expiration.

The most active option is the Oct. $18 strike call, where more than 3,200 contracts changed hands by 11:25 am EDT against zero open positions. Investors paid or received an average premium of $0.43 per contract depending on whether they were buying- or selling-to-open the position. Buyers of the contracts profit at expiration in the event that shares in CROX rally 11.0% over the current price of $16.60 to surpass the average breakeven point at $18.43. Meanwhile, sellers of the calls walk away with the full $0.43 credit received as long as the shoemakerís shares fail to rally above $18.00 at expiration.

The sharp drop in the price of the underlying may be just what some bearish strategists were hoping to see. Open interest indicates there are 770 existing positions open in the Nov. $27 strike put. Examining changes in the open interest level at that strike suggests 500 of the puts were likely purchased by one trader at a premium of $2.20 each this past Friday. Shares in Crocs ended the previous week at $26.97. The subsequent nosedive in the price of the underlying now sees the price tag on those puts 380.0% higher at $10.60 as of 11:30 am in New York. Premium on the put options may continue to climb if shares in CROX extend losses through November expiration. Options implied volatility on the stock jumped 28.4% to 87.9% in the first half of the session.

SHLD ñ Sears Holdings Corp.
A sizable bearish put spread on Sears Holdings Corp. may signal caution by at least one investor ahead of the specialty retailerís third-quarter earnings report in less than one month. Shares in Sears rallied 3.4% to $75.00 by 12:30 pm in New York, perhaps after department store retail sales figures showed a 3.6% increase year-over-year in the second week of October.

The pessimistic put activity indicates one options market participant picked up 8,200 puts at the Nov. $67.5 strike for a premium of $3.05 each, and sold the same number of puts at the lower Nov. $60 strike for a premium of $1.11 apiece. Net premium paid to initiate the spread amounts to $1.94 per contract, thus positioning the trader to profit should shares in SHLD drop 12.6% to breach the effective breakeven point on the downside at $65.56 at expiration next month. The investor could walk away with maximum potential profits of up to $5.56 per contract in the event that Searsí shares plunge 20.0% to trade below $60.00 at expiration in November.

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