Fading The Risk-On Rally In Weak Stocks

Betting against a battered company whose stock is rallying for no reason

CPI Comes In In-Line; Risky Stocks Rally

One of the stocks rallying today in the wake of today’s CPI release is that of a retailer at risk of bankruptcy. The only reasons it’s rallying now appear to be:

1. Short covering.

2. No explicit mention of bankruptcy on its recent earnings call.

3. The current rally in some of the riskiest and most-shorted names.

This is one of the stocks I mentioned in my CPI Day Gameplan post that I’d had in mind to bet against if the market rallied today. I just bought puts on it. More on that below, but first, two notes about these sorts of speculative options bets:

1. It’s unlikely I will bet against a rallying stock at the exact top, but this seems like a reasonable entry point.

2. Allocate only as much money as you are prepared to lose with this kind of trade. You will either be right or wrong by the time the option expires, and if you are wrong, your option will expire worthless (I plan to exit before expiration, but the general point stands).

On to the trade: