Business development company Hercules Technology Growth Capital (HTGC) has slid nearly 30 percent over the past year. One trader sees a similar drop occurring over the next few months.
That’s based on the October $10 puts. With 178 days until expiration, 7,622 contracts traded compared to a prior open interest of 170, for a 45-fold rise in volume on the trade. The buyer of the puts paid $0.60 to make the bearish bet.
Shares last went for about $13, so the stock would need to drop by $3, or about 25 percent, for the options to move in-the-money. That would also be below Hercules’ 52-week low of $10.94, set during the banking crisis in March.
The company is in the business of providing capital to high-growth startup companies, taking both equity and fixed income stakes. Given the drop in value of high growth startups in the past year, there’s a possibility that the company’s book of business remains overvalued.
Action to take: Investors should look for a different business development company for their current income needs. The 12.2 percent dividend on shares currently could be at risk if a significant amount of assets become impaired.
For traders, the October $10 puts are aggressive in terms of a possible drop, but have plenty of time to play out. They could deliver high-double digit returns or better in the months before expiration.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.