The 102-year-old car rental firm Hertz has filed for bankruptcy protection after its business all but vanished during the coronavirus pandemic. Hertz said in a US court filing on Friday (May 22, 2020) that it had voluntarily filed for Chapter 11 reorganization.
Its international operating regions including Europe, Australia, and New Zealand were not included in the US proceedings.
We have been speculating on HTZ with 110 shares, bought at $3.17 and sell covered calls for a very hefty $0.7 premium, but now we are facing to take our max loss of $247 from this trade.
Our original trade setup is here: Covered Call on HTZ - Potential income return 32.49% in 11 days
Here is what I originally told when construed this trade:
HTZ seems is facing bankruptcy threats, and I must admit this is one of the most speculative trades I've done lately - there is a huge chance of the company going bankrupt - will it happen in the next 11 days? Not so sure. Could share price drop from $3.17 down to $2 or $1 in the next 11 days? You bet.
And indeed, after Chapter 11 filling HTZ stock price plummeted more than 35% down to $1.82 in the after-hours trading session:
Our plan is to cut losses as max as possible, and we are looking to sell at the market price all of our110 shares of HTZ. If we will be able to sell at $1.82, this will be a relatively small loss, but I'm not so sure we will be able to do so, more realistic we are looking at the price range $1.5-1.
At the price level $1.82, our loss from this trade will be $0.65 per share or $65 ($3.17-$0.7-$1.82)
Let me say this, if we will manage to close this trade with a loss of less than $100, we will be quite happy
We are risking our max loss of $247 if there are no buyers for our shares and there are no options to sell. This situation (stock filling for bankruptcy) is new to us, and we don't know what actually will happen next
We will have to wait until Tuesday, May 26 to close this trade, as tomorrow, Monday 25th, NYSE is closed as Memorial day is observed in the US
Also, this should be a good reminder, not to trade options on companies we are not very well familiar with - I would say we should avoid selling options on stocks from travel industry. Too much unknown these days.
What Is Chapter 11?
Chapter 11 is a form of bankruptcy that involves a reorganization of a debtor's business affairs, debts, and assets. Named after the U.S. bankruptcy code 11, corporations generally file Chapter 11 if they require time to restructure their debts. This version of bankruptcy gives the debtor a fresh start. However, the terms are subject to the debtor's fulfillment of his obligations under the plan of reorganization.
Chapter 11 bankruptcy is the most complex of all bankruptcy cases. It is also usually the most expensive form of a bankruptcy proceeding. For these reasons, a company must consider Chapter 11 reorganization only after careful analysis and exploration of all other possible alternatives