Sunedison Inc (NYSE:SUNE) closed at $1.21 today. The stock is trading on the expectation that bankruptcy is just weeks away. The company has one month to make a debt payment or default. Traders love taking a gamble on stocks like this, in hopes it revisits its old glory days. The lure of a 100% profit or more is just too much for many to turn down. While odds of bankruptcy sit at approximately 75%, there is always a small chance they avoid it.
So should investors that MUST be in, buy the stock? The answer is no. Buying the stock means you must commit too much money. With odds of a bankruptcy so high, that is not smart. Instead, buy call options two months at the money or slightly out of the money. In two months, Sunedison will either be bankrupt or not. It will either be near zero or double, triple its current price. By buying calls you can commit less money to a potential 100% loser but net many times what the stock could net you if it gained 100%. For investors that MUST be in this stock, the smart move is to buy the call options.
