Adding ZOLT Puts

I love the carbon fiber story, but do not believe that ZOLT is the firm that is going to break through and be a good stock to hold. Their technology is awesome, but their execution is terrible and the ROI and Gross Margins are not there at the moment for me to want to invest in the company.

However, I have done so much research on the company that I do trade around events with ZOLT. This week, ZOLT is expecting to issue Q4 results. I think that, once again, investors will be disappointed.

I am not willing to bet a lot on my thesis, however, and I have only just nibbled at the trade today buying a few ZOLT Dec35 puts. I am buying put options because I believe that the retail investment community really doesn't understand all the stock dilutions that have occurred over the last 18 months with ZOLT and will be shocked when they see the P/L.

In ZOLT's defense, they have announced the large convertible debt package and have been using derivative accounting for years, but a huge GAAP quarterly loss is in the works and I am not sure that folks are ready for it. At least $20 million in convertible debt is due to be converted this quarter resulting in a $17 million charge to the P/L.

In addition, ZOLT has a number of lawsuit judgements against them in which they have not adequately set aside enough reserve to pay these judgements. Now they could announce a settlement with Gurit resulting in a lower judgement this quarter that negates this issue (and may even bump the stock) and this adds risk to my trade, but I think that ZOLT just played fast and loose with their reserve and may have to take an additional hit to the P/L to get these lawsuits behind them.

I may add to this trade tomorrow by either financing the puts I bought by selling Dec30 puts to pay for them (assuming therefore that the stock will be above $30 by options expiration) or by buying some cheap calls to hedge my puts and put a strangle in place.