Special Situations Watch: GMX Resources $1 Puts ($GMXR)

The May $1 puts have been intermittently available for 80 cents. The current (basis pre-split) stock price is 22.7 cents, so you're paying very little time premium.

The company is currently in an interest payment "grace period", having missed the payment on its Senior Secured Second-Priority Notes due 2018. However, and importantly,

"under Section 5.01 of the First Supplemental Indenture (the "2015 Notes Indenture") dated October 28, 2009, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee, governing the Company's 4.50% Senior Convertible Notes due 2015 (the "2015 Notes"), any failure to pay the principal or interest on any indebtedness in excess of $10 million in the aggregate of the Company when due and payable (at its stated maturity, upon required repurchase, upon declaration or otherwise) constitutes an Event of Default under the 2015 Notes Indenture."

So the company is technically in default on the 2015 notes already even though the trustee has not yet declared the principal plus any accrued and unpaid interest on the 2015 Notes to be immediately due and payable.

It seems highly probable that the company will file for bankruptcy, given the note situation, the company's warning that it may file, and the apparently yawning disparity between the value of assets and liabilities.

The large amount of preferred stock is trading at 24 cents, and the unsecured notes last traded at 35 (a 65% ytm). This, together with the reserve valuation and the very large amount of secured debt makes a bet against the common seem a high probability special situation.

If you assume you're going to close the trade at a pre-split stock price of 5 cents (65 cents basis current price) and pay 3 cents of commissions round trip, it's a net of 92 cents returned on a 80 cent investment, which is a 15% return.