Options: Put Action in Alliance Data

By Jud Pyle, CFA, chief investment strategist for the Options News Network

Alliance Data Systems(ADS Quote) reported fourth-quarter earnings Tuesday of $1.19 per share, 3 cents better than the analyst consensus on Wall Street. Despite this seemingly positive news, at least one investor chose to roll some protective puts out from February to June.

The June 30 strike puts have traded over 7,500 times vs. open interest of just 333, according to the Sidewinder report at www.onn.tv. But those puts are only half of the story. These June 30 puts were part of a roll. An investor sold the February 35 puts to close and "rolled" the exposure down and out to the June 30 puts. Because the June 30 puts cost more than the Feb 35 puts, the investor had to pay $1.30 for this roll.

The shares of Alliance Data have been an interesting example of the carnage that the financial crisis has wrought. Back in November and December 2007, the shares sank from $80 to $45 on concerns that Blackstone(BX Quote) was not going to go through with its proposed $81.75 per share bid for the company.

Alliance Data was a classic example of private-equity firms being forced to deal with a debt market that no longer wanted to fund levered buy outs. After the deal was officially called off in April, the shares battled back above $65 before rolling over with the rest of the market and are now near their 52-week low.

A buyer of puts like this does not mean that investors should run out and sell their shares of Alliance Data. In fact, this could be a bullish long holder who wants to keep holding the stock but just wants to own some out of the money puts in case they are wrong. Considering that Alliance Data trades for less than eight times analysts' estimated earnings for the next 12 months, upside in Alliance Data might be more likely than downside.