Is SKUL a Solid Short?

Shares of Skullcandy SKUL are currently trading lower on the session by 2.61%, at $12.15. Notably, shares are nearing the 52-week, post-IPO low off $11.79. If shares were to break that level, a wave of selling could ensue given that there are no pre-established support levels below. If fact, that selling seems likely to occur given that the company's lockup period for management stock sales ended at the beginning of this week. This means that all those weak holders at Skullcandy, who received some shares in the IPO can come out and chuck them into the marketplace. This is not new news; given the 22.95% short interest, it is clear that many others are betting on just that occurring. The long story short here is that, while a selloff is likely, you have to be careful that a face-ripping, short-covering rally does not take you by surprise. So, what's the Trade? Do to the high implied volatility in the name (Again, people are waiting for this stock to break), buying options outright would be foolish. At the bare minimum, you should consider a spread, like the Feb2012 $12.50/10.00 put spread @ $0.95-1.00. If you have a little more gumption, you can further decrease the cost basis of that position by selling the Feb2012 $15.00 naked. Be advised that this would be a naked position; be sure to understand the risk characteristics when doing so. Another way to play the short side would be to short shares here and then purchase the $15/10 risk reversal for even money. This means that your risk to the upside is capped at $15.00, while you profits to the downside are capped at $10.00. All in all, it is a rather small risk position, or at least defined risk. Skullcandy, Inc. develops and distributes headphones and other audio accessories to retailers throughout the United States and to distributors in various countries worldwide.