SunEdison’s (SUNE) shares closed down by 24% today. The reason for that is that the company had to postpone its full-year results due to an internal investigation into its financials, according to Bloomberg. In other words, there is a problem with the books: (Source: Google Finance) As you can see from the chart above, the stock is probably the wildest card on the Street: in the last five trading days, it went from ~$1.30 per share to over $2.5 and went back to the ~$1.50 area. Do I want to own it? No. And not because I cannot stomach the volatility – it is irrelevant to long-term investors, one of whom I am. I believe that this business is fundamentally doomed, and a friend of mine warned investors about it back in December. However, what I care about when stocks like SunEdison drop a lot is this: implied volatility. Why? Because options become more expensive when implied volatility increases, and it does when stocks drop in value. So why do I care about it? Well, when implied volatility rises, option prices (both for call and puts) also increase. Take a look at this options table: (Source: Yahoo Finance) The implied volatility for this stock is in triple digits. This makes the options on this stock very expensive. However, I did not choose the table by chance. Take a look at the premiums on the January 2017 calls! I will give you a hint: compare the current stock price to the premiums on calls, and you will get it. Here is my suggestion: I recommend buying SunEdison’s shares and selling January 2017 calls (preferably, out-of-money calls with a strike of $2 or higher). Over the next year, one of three things will happen:The company will survive and recover, sending the stock into stratosphere;The company will go bankrupt. In this case, the stock will end up at zero;The company will survive but continue is mediocre performance, in which case the stock will stay in low singles. Based on the above scenario, there are three monetary outcomes, if you execute the trade that I am recommending:In this case, the stock will go above $2 – $3 per share which means that you will have to give away the upside in the stock. Hence, the maximum amount you can earn in this case is $1.2 per contract ($0.70 in premium and $0.50 between the recent price and the nearest strike). This translates into an 80% return in less than one year (remember, today is the first day of spring), fees excluded! This sound like a great deal to me. Keep in mind, however, that, based on the input data, the probability of the stock being in the money is about 70%: (Source: option-price.com)In this case, you lose your entire investment of $1.50 per share, which is a 100% loss. However, keep in mind that you will also keep the $0.70 premium as the options will expire worthless. In this case, your maximum loss is just above 50%, fees excluded. Not too bad for such a good upfront return, in my opinion; If the stock stays above $1.50 per share but below $2, you will keep the premium and earn a little return on the stock. If SunEdison becomes a penny stock, you will keep the premium but lose on the underlying (but then, again, you can write even more options on the stock). The payoff diagram is given below: (Source: optionsprofitcalculator.com) Your minimum position is 1 options contract, which translates into 100 shares. If you buy 100 shares, you will spend $150, fees excluded. At the same time, you will earn $70 in premium which results in a net position of $80 (or $0.8 per share – this is your break-even price). You can view this as being long the stock from $0.8 per share. If it drops below this price, you will lose. If the stock keeps above this level, you will be in-the-money for the entire duration of the option contract. I find this trade very lucrative. What do you guys think?