The Story of SPRT: Breaking Down the World’s Biggest Short Squeeze

by | Sep 8, 2021

  • Why SPRT options have been untradeable so far…
  • Recapping some important concepts, like implied volatility and market making…
  • What to watch for when trading options on volatile stocks…

Hey, Evolver.

Right now, it seems like every trader is talking about one stock, and one stock only — Support.com Inc. (NASDAQ: SPRT).

SPRT came out of nowhere last week with a massive short squeeze. It has since taken the market — and specifically the options pits — by storm. 

But before we break down the mechanics of this epic short squeeze, let’s run down a brief timeline of what’s happened so far…

A Timeline of Events

Embed: SPRT 10-day 5-minute chart — courtesy of StocksToTrade.com

Monday, August 23: SPRT opened at $9.30. But soon after the bell, it started rallying. It closed the day up almost 20% at $11.17.

Tuesday, August 24: SPRT was up as much as 30% before selling off intraday, closing at $11.67. Meanwhile, traders began discussing the stock’s reported 75% short interest on social media…

Wednesday, August 25: SPRT rose another 20% higher, closing at $13.96.

Thursday, August 26: SPRT surged 41% intraday, closing at $19.70. Then, SPRT ramped another 50% in after-hours trading…

Friday, August 27: SPRT opened off of its after-hours high at $37.50. But the momentary bearishness didn’t last long. SPRT went on a violent tear later in the day, eventually hitting a high of $59.69 before showing topping signs.

At this point, I was foaming at the mouth to short this stock. But when examining the prices of the options chain, it was clear that buying puts would be a risky move…

The Problem With SPRT Puts

Some momentum stocks get so hot that the options become untradeable. Unfortunately, this was the case with SPRT puts last week.

This is all due to a concept we discussed in a recent issue — implied volatility (IV).

When a stock makes double-digit moves day after day, market makers have no choice but to spike the premiums (the price of the options contracts) to astronomical levels.

Market makers do this by raising the IV associated with the contracts. With SPRT, the IV has been hovering around 550% on monthly straddles. That’s insanely high.

The other issue has been the lack of weekly options offered on SPRT. If weeklies were written, the short lifespan of the contracts could lead to lower-premium trade opportunities.

But with only monthly options available, the IV has spiked the options’ premiums to extreme levels. The contracts are simply too expensive for the risk/reward relationship to make sense.

The Bottom Line on SPRT

All of these factors combined and created a scenario where SPRT puts were effectively untradeable. With premiums this high, you’d be better off shorting common shares.

Sure enough, this proved to be true last Friday, August 27…

SPRT exploded into a dramatic blow-off top just before the $60 level. Then it plummeted down more than 40%, closing at $27.95.

Meanwhile, the puts went absolutely nowhere. For example — at their lowest, 9/17/21 $30 puts were trading for $9.37. This was when SPRT was trading around $60.

By the end of the day, when SPRT had dropped nearly 40% off the $60 level, those same puts were trading for $12.80. That’s just 36% higher than they were when the stock was peaking.

The relationship between options premiums and share prices isn’t supposed to work this way. 

As depreciating assets, options should generally pay out more than a common-share short position with no expiration date. This should be especially true for contracts that expire in a few weeks, as the 9/17 strikes do. 

When monthly contracts are as expensive as SPRT’s (with no weeklies available) — you should sit on the sidelines. 

You can consider selling calls or shorting common shares. But whatever you do, don’t buy puts or calls when the IV is in the high triple-digits.

Lesson Summary

  • SPRT has been building up a massive short squeeze, which took off on a wild rally last week…
  • The lack of weekly contracts offered made trading SPRT options nearly impossible…
  • When implied volatility gets exaggerated on high-flying momentum stocks, it’s best to sit on the sidelines and wait for the premiums to drop. 

Conclusion

The same factors that make trading options so incredibly exciting — time decay, implied volatility, premium spikes — can occasionally render them untradeable.

This was the case with SPRT last week. If you miraculously got in on this trade before the premiums went crazy, congratulations. For the rest of us, the only move was to patiently sit on the sidelines and watch the pandemonium.

As an options trader, you need to be acutely aware of the individual factors that affect premiums. If you stay on top of these things, you can potentially avoid entering trades you shouldn’t even be considering.

Be careful,

Mark Croock

Editor-in-Chief, Evolved Trader Daily

P.S.

*All content in this newsletter is intended for educational and informational purposes only.

The material in this newsletter is not to be construed as (i) a recommendation to buy or sell stocks, (ii) investment advice, or (iii) a representation that the investments being discussed are suitable or appropriate for any person.  No representation is being made that following Evolved Trader Daily strategies will guarantee a particular outcome or result in profits.  The price and value of stocks may fluctuate depending upon various market factors, and, as such, the strategies used by Evolved Trader Daily to adjust for those fluctuations may change without notice. 

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You should not trade with money you cannot afford to lose and there is a risk that trading stocks will result in a complete loss of your investment.  Trading stocks, particularly penny stocks, is not suitable for everyone and requires hard work, due diligence, capital, and substantial time to monitor the market and timely execute trades.

Meet Mark:

Mark Croock is a former accountant who after studying under Millionaire Trader Tim Sykes turned his small account into $3.19 Million in trading profits by applying Tim’s strategies to options trading.

He started Evolved Trader to pay it forward and help other traders learn how to leverage options

 

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