Unusual Options Volume Underscores Possible Opportunity in SmileDirectClub (SDC)

During the initial wave of the COVID-19 crisis, SmileDirectClub (SDC), which specializes in clear aligners and teeth straightening kits, did not appear a lucrative opportunity. At the time, few people were interested in going to clinics unless absolutely necessary for fear of infection. While SDC stock popped higher from the doldrums of 2020, shares began tumbling hard since late January of 2021.

Indeed, circumstances didn’t appear remotely auspicious until just recently. For example, in the trailing year, SDC stock hemorrhaged 65% of equity value. No matter how an optimist frames such a loss, the harsh reality is that companies don’t implode this much without reason. For SmileDirectClub, the business struggled to generate the revenue necessary to attract prospective investors.

After posting revenue of $750.4 million in 2019, the subsequent impact of the COVID-19 pandemic resulted in 2020 sales slipping to $656.8 million. In the following year, revenue again fell, this time to $637.6 million. And on a trailing-12-month (TTM) basis, SmileDirectClub disappointed again, ringing up only $510.5 million.

Further, the quarterly earnings performances have been a mixed bag. In the fourth quarter of 2021 and the third quarter of 2022, SmileDirectClub managed to pare down expected losses for earnings per share, resulting in positive surprises. However, in Q1 and Q2 of 2022, the company posted deeper losses than expected, leading to negative surprises.

Nevertheless, SDC stock has been a massive winner this year. Since the January opener, shares gained over 85% of equity value. And while Friday the 13th traditionally denotes bad luck in western cultures, SDC skyrocketed on that day, gaining nearly 47%.

Much of the enthusiasm may have centered on speculation regarding a possible short squeeze. According to data from Fintel, the current short interest (percentage of float) is just under 20% while the short interest ratio is 3.35 days to cover. As well, options traders jumped in, with SDC stock one of the highlights of unusual activity in the derivatives market.

SDC Stock Sparks Unusual Stock Options Volume

Following the close of the Jan. 13 session, SDC stock represented one of the highlights in Barchart.com’s screener for unusual stock options volume. This stat shows the difference between the current volume and the average volume over the past month. Usually, traders leverage this data to determine which stocks may be due for big moves ahead.

Specifically, SDC’s volume level reached 38,948 contracts against an open interest reading of 160,842. Call volume hit 35,183 contracts versus put volume of 3,765. Further, the delta between the trailing-month average total volume versus the prior session volume came out to 924.41%. The implied volatility (IV) rank hit 46.83%, which indicates the (at the money) average IV relative to the highest and lowest values over the trailing one-year period.

To briefly explain, IV signifies the expected volatility of a stock over the life of an option. As certain influencing factors for the underlying investment changes, the IV will likely change as well. Further, as demand for an option increases, so too will its IV.

The IV low for SDC stock was 24.23% on Aug. 9, 2022. Many months later on Jan. 11, 2023, SDC hit its IV high of 568.96%. Prospective investors should note that per Barchart.com’s technical analysis gauge, SDC ranks as an average 64% sell.

In the short and middle terms, technical indicators point to a generally split sentiment (though leaning bearishly). In the long term, the signs definitively signal pessimism. While SDC stock is close to doubling in the (young) year so far, its lifetime return pings a loss of more than 96%.

Presently, analyst sentiment is pensive though this represents an improvement from prior assessments. Three months ago, SDC stock featured a consensus view of “moderate sell,” breaking down as five holds, one moderate sell and two strong sells. In the current month, the consensus now stands at “hold.” Individually, SDC features one less strong sell rating and one more hold relative to three months ago.

Overall, though, caution remains the key theme for SDC stock. Presently, its 60-month beta stands at 1.98, which is considerably more volatile than the benchmark equities index.

A Fundamental Catalyst Also Supports SmileDirectClub

Although the narrative surrounding SDC stock generally centers on speculation, there’s also a fundamental reason to consider shares for the long haul. And this involves the gradual normalization of society, particularly in the workplace.

While remote work offered participating enterprises the ability to move forward in spite of the COVID-19 disruption, amid recessionary pressures, fewer companies are willing to play ball with their employees. It’s either return to the office or look for other another job. Indeed, even Disney (DIS) laid down the law, with reappointed CEO Bob Iger requiring that presently hybrid employees return to the workplace four days of the week.

With greater incentives to look presentable in public, SmileDirectClub may rise as workers come out of their living room quarantine. Likely, this same catalyst sparked upside for fashion-related investments such as Rent the Runway (RENT).

As mentioned earlier, though, SDC stock presents significant risks. Primarily, it’s lost significant value in the charts. Moreover, short-squeeze attempts can evaporate quite spectacularly. Nevertheless, SmileDirectClub might not be an entirely hopeless case because of the social incentivization factor. For the risk-on portion of your portfolio, it might be worth a small, calculated wager.

More Options News from Barchart

• EQT Corp Options Have High Implied Volatility, Ideal for a Jade Lizard Strategy
• Airline Call Options Unusually Active Despite FAA Debacle
• Should Retail Investors Buy the Explosive Options Movement in Arrival (ARVL)?
• Disney's Spike Attracts Covered Call and Short Put Option Income Players

On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.