Shares of marine shipping company Star Bulk Carriers (SBLK) are down about 14 percent in the past year, as shipping rates have started to come off extreme highs. One trader sees an even bigger drop for shares ahead.
That’s based on the December 16th $16 puts. With 45 days until expiration, 6,761 contracts traded compared to a prior open interest of 102, for a 66-fold rise in volume on the trade. The buyer of the puts paid $1.60.
Shares recently went for just over $17.50, so they’d need to drop about $1.50, or about 8.5 percent, for the option to move in-the-money. That would also represent a new 52-week low for shares, just under the prior low of $16.85.
While the company is still seeing high profit margins, a big drop in shipping rates in the past year is likely to weigh on profitability and revenues going forward for the dry bulk shipper.
Action to take: Shares look inexpensive given their PE ratio of just 2… and forward ratio of 4. But that will likely expand as profitability falls in the coming months. Interested investors should wait for the downtrend to end before picking up shares. The company’s dividend yield also looks unsustainably high right now, so buying shares after a cut may be a better strategy.
For traders, the December puts play into the current downtrend in shares. Traders can likely make high-double-digit returns in the coming weeks if the rate of the current downtrend continues.
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.