Putting up a SHLD against the shorts
Shorting stocks is as old as stocks themselves. I even think the US had an SEC commissioner who shorted stocks during the 1929 Crash and then outlawed hitting downticks after the Crash. The problem for short sellers is not that stocks go up (which is bad for them for sure) but that the stock is called away at inopportune times as they are forced to “cover” the position. That action causes some disruption as forced buying ensues and pushes up the market price of the stock. As a whole, keeping a theme from last week, the market continues to move sideways as the implied volatilities start to wither away in the front month. When a heavily shorted stock has a sudden burst it draws attention.
The screen shot below is my active AlphaVision™ for Bloomberg landscape measuring 1 week total return and short term historical and implied volatilities. A spike in the name means the 1 week total return is near the top for that sector. A red color means the short term realized volatility (HV10) is blowing through the short term implied volatility (IV10). SHLD (Sears Holding Inc) stands out as one of the stocks that display market behavior nearly opposite of most of the other active names that trade.
A little further look into SHLD has the name coming off of a recent $30 low. The huge run up to near $50 in a short time outstripping the implied volatility makes the name a bit more interesting. The Sears story is about a decline in the ability of the company to grow sales (the problem is really declining sales) from its huge base and the shorts piled in. Because of the short interest in the name the recent run-up looks like some shorts were “squeezed” to cover positions. No doubt when the “squeeze” starts to cool the implied volatilities will come down with the stock price. Keep an eye out for another pop or small drift lower as the current rise might be temporary and some short calls spreads might work rather nicely.
Author Note: Stocks with high short interest are very volatile and pose great risks. Seek advice from a registered investment professional before initiating any transactions.
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