buying put options on stocks close to going bankrupt

S

stock_trad3r

i was thinking of buying long term put options in a basket of stocks that have a high risk of going bankrupt ( hemorrhaging cash) such as

ANR
CLF
NAV
JCP
CHK
WLT
ACI

these stocks have strongly negative EPS, horrible technicals,


would you buy 1-year OTM puts or buy puts on a monthly basis?
The premiums are very high but these stocks seem like goners
 
What you need for this to work is an identifiable binary event. Options cannot price correctly extreme events and you could benefit from it. Some traders have made a specialty out of this.

In many of the cases you pointed out, a slow leak into oblivion is more likely and that is not the way to go IMO...
 
If you think that a stock may suddenly collapse to zero, then all other things being equal I think buying the monthlies would make more sense. That is because if the stock goes to zero then you don't want to have paid any more time premium than necessary for your option. If you think a stock may slowly bleed out, then buying a longer-term option would probably be the way to go. This all of course assumes that the risk/reward justifies the trade given the high premiums for puts on failing companies.
 
Not entirely sure how well capitalized you are here, but one thing that could be reasonable is sort of a capital structure arb. You look at companies near collapse, then look at bonds with a maturity of less than a year. Get into those, extract a juicy yield and hedge your notional with a position with the options.

In general bankruptcy proceedings will drag out and as you know debt holders are at the top of the food chain.
 
given today's relentless climb in the market, losing money was inevitable;
down about $200 which is pretty good for an put option portfolio in a tireless upday ..have $3.4k in coal puts ; $9k in cash

Not gonna put all my $ in at once here in case we get a big bounce. I think the cheapest of the coal stocks (ACI, ANR) are closer to BK risk than the more expensive ones, but less profit potential.

the funny thing is even my long positions would have been down too because this rally seems to be limited to boring defensive sectors
 
Quote from noregrets:

If you think that a stock may suddenly collapse to zero, then all other things being equal I think buying the monthlies would make more sense. That is because if the stock goes to zero then you don't want to have paid any more time premium than necessary for your option. If you think a stock may slowly bleed out, then buying a longer-term option would probably be the way to go. This all of course assumes that the risk/reward justifies the trade given the high premiums for puts on failing companies.
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Well said. I never thought of it that way before.
 
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