Could Lumber Liquidators be the ultimate fixer upper? Despite an abundance of bad news, that's exactly what some traders are betting on.
Shares of Lumber Liquidators dropped more than 25 percent Wednesday on a big fourth-quarter earnings miss and the revelation that the company could be the subject of a negative piece in an upcoming episode of CBS' "60 Minutes." Additionally, Lumber Liquidators disclosed in its 10K that the Department of Justice may file criminal charges related to potential violations of import laws.
But while the sharp selloff has some traders looking for cover, options traders saw a buying opportunity.
Nearly 27,000 calls traded hands in the company Wednesday, compared with the typical day of about 1,000.
Specifically, one trader closed a bearish bet on the stock by selling 500 May 55-strike puts for $7.90, and then used some of that money to buy 500 of the May 55-strike calls for $5.50. The trade is a wager that Lumber Liquidators will rally above $60.50 per share, or 20 percent higher, by May expiration.
"This is clearly an oversold situation with a tradable opportunity," said Janney Montgomery Scott's David Strasser, who has a neutral rating on the stock. "While this will ultimately bring about some bad press, we think this will drive positive change in the company as it continues to tighten its governance and ensure a higher quality supply chain."
According to Nathan, while sentiment might be shifting in Lumber Liquidators, making money through outright options purchases might not be the wisest strategy. That's because the recent volatility has increased the price of options on the stock, meaning the underlying stock would need to see outsized moves in order for those options to be profitable by expiration.
Said Nathan, a CNBC contributor: "For those looking to make directional bets in a very volatile name like this, it's really hard to make money with long premium options when implied volatility is this high."