Option Pits on Fire After hhgregg, Inc. (HGG) Guidance

Poor guidance led to explosive option volume on hhgregg, Inc. (HGG)

by Kirra Fedyszyn

Published on Jan 6, 2016 at 2:49 PM

Electronics retailer hhgregg, Inc. (NYSE:HGG) took a dive today, last seen 26.7% lower at $2.80 and on the short-sale restricted list, after tapping a new all-time low at $2.62. The company issued disappointing sales guidance for its fiscal third quarter, and options traders are betting on a short-term ceiling for HGG. 

HGG is setting the option pits on fire today. At last check, puts were being traded at 674 times their typical intraday pace, with total option volume more than 100 times its usual pace, and hitting an annual high by a wide margin.

Most of the action has transpired at the January 2016 3 strike, where roughly 5,900 calls and 5,300 puts have traded. The next most-active option is the February 2 put, with just over 500 contracts exchanged.

Assuming some of the 3-strike activity is related, it looks like a speculator could be implementing a synthetic short position -- which mimics the risk/reward dynamic of selling HGG short. Specifically, the trader likely bought the 3-strike puts, and simultaneously sold the 3-strike calls. If HGG remains south of $3 through next Friday's close, when front-month options expire, the puts will be in the money and the short calls will expire worthless. As with a short seller, the speculator's losses will start to add up if HGG climbs atop the $3 level within the options' lifetime.

So, why didn't the trader simply buy the puts? Well, HGG's 30-day at-the-money implied volatility has skyrocketed 24.1% to an annual high of 112.7%, more than twice the equity's 30-day historical volatility of 42.8%. In other words, HGG's short-term options are relatively expensive amid heightened volatility expectations, so the bear might've sold the calls to trim the cost of entry.

Speaking of short sellers... While bears can't short any shares of HGG today, 29% of the stock's total available float is already wrapped up in short interest. And at hhgregg, Inc.'s (NYSE:HGG) typical pace of trading, it would take more than eight weeks for bears to buy back all of these shares.

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