Overstock Stock: Blockchain Led to a Second Wind

Posted On November 8, 2017 1:54 pm

They say everyone in America should get a second chance, and if you’re an ambitious and creative entrepreneur you may even get a third and fourth chance. This is especially true if you know how to tap into the zeitgeist of the internet and blockchain technology with a compelling story and an easily accessible investment vehicle.

Overstock (OSTK) has all of the above in spades.  It was originally formed in 2004 in the echo dot.com bust on the belief it could take on or become the next Amazon by reselling others’ products, such as discontinued, imperfect, and yes, overstocked merchandise at deep discount prices.

The stock hit an initial high of $75 in 2005, but as other online and brick and mortar firms learned to manage inventory, Overstock sales slowed and margins compressed. The company hung around, but the stock fell sharply and had been mostly stuck in the low teens for past decade. During this time, Overstock mostly fell off the radar of both investors and analysts.

That was until charismatic founder and CEO Patrick Byrne returned in 2014 and began positioning the company as a play on Bitcoin and blockchain.

While the core retail business continues to lose money and show negligible revenue growth, the attachment to blockchain has helped shares soar some 180% in just the past 4 months.

What’s surprising is that short interest, which once stood above 50% of float range back in mid-2000’s, has barely ticked up and is currently at a relatively low 9% of float. This suggests people were a lot more skeptical regarding building an online retailer than they currently are about Bitcoin’s future and Overstock’s ability to profit from it.

Overstock is set to report earnings after the close Wednesday, Nov. 8.  At this point the earnings are negligible, barely tracked, and are unlikely to elicit much of response.

Rather, the stock moves on Bitcoin, and unless a major new blockchain initiative is announced, the stock should remain within the $35-$45 range.

But given the stock’s recent run, the implied volatility ahead of the report is pumped to the 175% level, suggesting an 8% price move following the report.

I think this stock remains range bound and am using an iron butterfly to collect premium by selling at-the-money strikes.


-Buy to open 4 contracts OSTK Nov. 35 Put

-Sell to open 4 contracts OSTK Nov. 40 Puts

-Sell to open 4 contracts OSTK Nov. 40 Call

-Buy to open 4 contracts OSTK Nov. 45 Call

For a Net Credit $4.25  (do not go below $3.90)

Here is the risk/reward profile graph.

The position will benefit from the decline in IV (PEPC) and if shares remain within $35-$45 range.

The max loss is limited.  It is unlikely I would hold until next Friday’s expiration.

I’d look to close for a $2.00 debit or a 66% return on risk.

Related: These 4 Things Matter the Most When Sizing Up an Investment

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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.