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Thursday, December 7, 2023

Plenty of put selling as market slide picks up steam

Today’s tickers: LTM, AA, JCP, LEG, INTC, ADS, FXI, GE, APOL & MDCO

LTM – Life Time Fitness, Inc. – The fitness and health brand edged onto our ‘hot by options volume’ market scanner after a large sale of puts was transacted in the March contract. Shares of the professional fitness company are currently down by over 5.5% to $9.42. It appears that one investor sold over 9,700 puts at the March 7.5 strike price for a premium of 25 cents each. Is this some optimism on behalf of an investor despite the decline in share price today? The chunk of puts observed represents nearly half of the existing open interest on the stock, and thus may indeed be tied to a short stock position. If it is not tied to stock but rather is naked put-selling, this investor faces real downside exposure should shares continue declining.

AA – Alcoa Inc. – A large 10,000 lot put spread just traded in the April series of Alcoa whose shares are taking a 7% beating today at $5.85. An investor traded the 5.0 and 7.5 puts at a net 1.41 premium. Implied volatility on the options is running at around 104% given the slip through the existing 52-week low.

JCP – J.C. Penney Company, Inc. – The major retailer popped onto our ‘most active by options volume’ market scanner after more than 27,000 puts – representing about 20% of the total open interest on the stock – traded at the March 12.5 strike price. JCP is lower by 4% at $14.50 today. Open interest of only 6,129 contracts currently resides at the 12.5 strike confirming that today’s trading has fresh impetus. Within today’s total volume at the strike, over 14,000 puts sold for an average premium of 37 cents. This indicates that a trader is either selling puts in conjunction with shorting the stock or just outright confident that the shares won’t slip below $12.13 by expiration. If they do, this investor would be happy to own them.

LEG – Leggett & Platt, Inc. – The manufacturer and producer of a variety of engineered products has declined slightly by 3% to $11.87 today, and appeared on our ‘hot by options volume’ market scanner after over 10,200 puts were shed by one investor at the March 10 strike price for a premium of 15 cents apiece. The lot of puts sold represents more than half of the open interest existing on the stock. As with LTM and JCP it is difficult to tell whether these trades are tied to stock. Are investors trying to create extra yield by selling the stock and selling puts? Or, are they thrill seekers looking for an adrenaline high as they monitor naked put sales in today’s volatile market? Either way today’s contrarian put selling was interesting to watch, but only time will tell whether today was the right day for such optimistic sales.

INTC – Intel Corporation – The semiconductor chip manufacturer has experienced a double-dose of options optimism today, despite the 4% decline in its share price to $12.19. Bullish call buying was seen in the March contract at the 14 strike price, where over 26,500 calls were purchased for an average price of 20 cents apiece. In order for these calls to land in-the-money by the end of March, shares will need to pick up steam and rally by 16%. If shares can rise to a breakeven price of $14.20 then these call-buyers will have taken a beneficial contrarian stance today. More optimism was observed with the sale of 5,000 puts for a premium of 1.56 each at the July 12 strike price. Perhaps this bull believes a rally is in store for Intel.

ADS – Alliance Data Systems – An investor appears to have a pretty good insight on the fortunes or otherwise of merchant services provider, Alliance Data Systems, which was in good company reaching a fresh 52-week low today at $27.83. We had to go back to trading patterns in put options as far as October to see when a 12,500 lot chunk of puts was bought at the January 2010 expiration. An investor at that time paid 3.00 for rights to sell shares at a fixed 25.0 price tag on the company while at the time the underlying shares were at a lofty $44.74. As we approach the strike price today the investor has taken profit by selling the puts at 5.0 apiece and doubled down at the 15.0 strike price expiring January for a 1.65 premium. Clearly this investor sees a worsening in consumption hurting core business.

FXI – iShares FTSE/Xinhua China 25 – Shares are higher in this Chinese ETF just slightly today at $25.16. One option trade in particular caught our attention in the May contract, where an investor sold 5,000 puts at the May 18 strike price for a premium of 55 cents, and purchased 5,000 calls at the May 31 strike for 95 cents each. The net cost of the trade amounts to 40 cents per contract and yields a breakeven share price of $31.40, at which point profits begin to amass. This investor has cast his vote of confidence in China and in the recovery plan currently in progress by seeking upside exposure at the 31 strike. The establishment of put sales as a vehicle to fund the cost of getting bullish on the Chinese fund was a creative way to significantly reduce the price paid by this investor. If shares can rally higher by 24% by expiration then the calls will be money-makers for this trader.

GE – General Electric – Another 52-week low today at $8.80 and a decent volume of around 15,000 put options heavily bought by bearish investors paying 47 cents for the privilege of getting short of the shares for March expiration. Heavier volume was apparent at the in-the-money puts at the 10 strike, where one 11,000 lot trade was sold perhaps by an investor locking into gains. On the call side in March both 10 and 11 strikes were heavily sold indicating an evaporation of confidence in a nearby rebound.

APOL – Apollo Group, Inc. – Shares A – The higher education company has seen shares slip by over 1% to stand at $79.05. It appears that one investor has sold 17,000 calls at the March 95 strike price for a premium of 55 cents. While this large sale could be tied to stock in the form of a covered call, we believe it is essentially an individual looking for “free” premium. Shares would need to surge upward by 20% and go through the 52-week high on APOL of $90.00 to $95.00 in order for this trader to get stuck with obligations to a call buyer. With a delta of just .09 on the trade, it looks like this investor is unconcerned by the 9% chance of the calls landing in-the-money by expiration. Thus, this individual has pocketed premium today while bearing minimal risk on the calls over the next month.

MDCO – The Medicines Company – Shares have rallied by more than 3% today to $13.38 for the pharmaceutical company, which specializes in acute care hospital products. One bullish option trader has revised his outlook by initiating a calendar spread on the stock. Looking for a gradual incline in share price for MDCO, this trader sold 5,000 calls at the July 17.5 strike price for a premium of approximately 1.00 per contract, and then purchased 5,000 calls at the lower strike price October 15 strike at a cost of 2.64 apiece. It appears to us that by increasing the time to expiration and lowering the strike price to 15, this investor is looking for shares to rise, though not as quickly or as much as his previous position would suggest. The net cost of the trade amounts to 1.64, and thus if shares can rally to a breakeven share price of $16.64 come fall, this investor will begin to garner profits.

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