The shares of homebuilder Beazer have collapsed since June, falling from a high of 21.19 to a bombed-out low yesterday of 13.24. But could you have made money by shorting the stock if you’d seen it coming, as many must have? The answer is obviously yes if you had been short BZH shares. But if you’d attempted to leverage the bet by using put options instead of stock, you’d have needed perfect timing to make any money at all. More likely is that you would have been short too early — meaning short when the stock, defying all logic and common sense, rallied 50%, from $14 to $21, during the first half of 2105. How maddening! That would have cost you dearly, putting you so deep in the hole that even now, with BZH plummeting, you might still be in the red. Oh, and one more thing: Most of your profits would not have come until this week, when a downdraft saw BZH dive from 15.28 to 13.24, or nearly 15%, in just two days.
The inset graph shows the price of January put options with a strike price of 15. They closed Tuesday at 1.90 after trading mostly in the range 0.95-1.35 between mid-April and recently. This implies you could have doubled your money if you’d bought the low of the range and sold yesterday’s high. We know for certain that no one actually did this, since zero Jan 15 puts traded on Tuesday. And even if they had, how many do you think you could have sold at the top? It’s not as though the market makers — I was one myself for 12 years — would have taken you out of your position for top dollar. No, if they’d seen more than a few of the Jan 15 puts come in for sale, they’d have low-balled you with a soft bid.
The point of all this is to explain why you’ll have better success tossing hoops at a carnival midway booth than buying put options based on a bearish hunch. As the evidence proffered above suggests, you’d need to have been a trading wizard with perfect timing and good luck to have made even a modest profit on Beazer over the months the stock’s death spiral was accelerating. The implication should not be lost on permabears who think they can make a ton of money when the stock market finally crashes: it will; but you will not.