Your Options for ZAGG
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
ZAGG (NASDAQ: ZAGG), maker of protective coverings and other hand-held electronic devices, has taken a hit in the last couple weeks as many investors and traders doubt the company's ability to continue to grow earnings in the face of increased competition. Plus, they view former iFrogz employees (ZAGG acquired iFrogz) dumping stock as a sign of weakness. The recent rapid fall in share price is no doubt what placed ZAGG on my high-implied-volatility scan. However, this increased volatility provides new opportunities for both long and short investors.
ZAGG is currently trading in the 90th percentile of its historical volatility range (measured of the last 336 days) with an implied volatility of 94%. The historical (actual) volatility over the last 20, 50, and 100 days are 94%, 77%, and 75% respectively.
If you are bearish on ZAGG stock, you might consider a 1x2 put spread. Using the $8 and $4 strikes in the May contract, one can create a faux-butterfly spread and take advantage of the high implied volatility in the $4 contract (117%). Note that I would be willing to give up some of the downside in ZAGG since, although it may face margin compression and decelerating earnings, it has real earnings and is not in danger of bankruptcy.
To execute this strategy, buy one May $8 put for $2.50 and sells two May $4 puts for $0.35 each, paying a total of $1.80 for the spread (if you work the spread, you can probably get the spread a little cheaper). The max loss for this position is the amount paid for the spread ($1.80), which occurs if ZAGG is above $8 or at $0 at May expiration. The max gain for the position is $4, which occurs if ZAGG is at $4 on May expiration. Moreover, the trade is currently trading with $0.83 of intrinsic value, so only a $0.97 move (14%) to the downside is needed to break even at expiration.
If you are bullish on ZAGG and looking to purchase the stock, you might consider selling the January $7 strike put for $0.50. If ZAGG rallies, you collect the $0.50 (almost a 7% yield in 3 weeks). If ZAGG falls below $7, you are forced to buy the stock for $7, getting long the stock for effectively $6.50, just north of the low it bounced off of last week. Fair warning: only sell one contract for every 100 shares of stock you planned to buy. If you sell more, you are levering up and taking more risk than you probably should.
I do not have a position in any of the companies mentioned in this post.