Bottom-Fishers Suck Up P&G Calls

Options investors were voting with their bucks against several big-name stocks as the Dow's sizable drop made Tuesday anything but Super for the nontech sector.

Volatility Index Today % Change 24.39 +5.36 Source: ILX

Procter & Gamble (PG) saw its stock plunge after the company issued a deadly earnings forecast. The stock dropped 27 7/16, or 31.4%, to 60.

As a result, P&G's April 80 calls, which started the morning in the money, traded 3,030 contracts against only 173 contracts of open interest. The contracts traded at around 7/8, or $87.50 per contract, at midday after dropping a stunning 91% in value since the last time they traded.

Put/Call Ratio Today (Noon) Previous Close 0.37 0.35 Source: ILX

That kind of gutsy bottom-fishing is unusual on such a terrible day for any stock, but since the price evaporated so quickly, there's likely upside in the calls if the stock price recovers even slightly.

Although the 80 calls might seem odd for a bounce play, this particular strike price was the only game in town when the news of P&G's announcement came across the wire, said Rod Jamieson, options strategist at First Union Securities. As the options exchanges scrambled to put up strikes in the 60-to-65 range, investors reluctantly got into the 80s.

Another consumer-products company, General Mills (GIS), was seeing heavy put action in its March 35s and October 30s, which traded 500 and 2,250 contracts, respectively, both against no open interest. General Mills' stock was down slightly to 31 1/16.

Judging by the time and prices of the trades, it appears the investor was selling the October 30s at 1 5/8, or $162.50, and buying the in-the-money March 35s at 3 1/2, or $350. The trade allows him to pocket a net $200,000 but leaves him on the hook to buy the stock at 30 in October.

Elsewhere, Microsoft (MSFT) was gallantly sopping up all options trades, leading the activity in both calls and puts. With Mister Softee leading the Nasdaq up, investors saw it as the best big name out there. Heaviest were Microsoft's March 95s, with 15,800 call contracts and 3,400 put contracts trading, and its March 100s, with 13,300 calls and 4,700 puts moving. Microsoft was up 4 5/16 to 94 15/16 at midday.

With the whipsaw market giving traders headaches -- the Chicago Board Options Exchange volatility index was getting dangerously overheated this morning as it climbed 12% before cooling off -- it was no surprise that some hedging was going on.

Investors piled into their favorite hedge of late, the tracking stock on the Nasdaq 100 (QQQ) trust, which was at 226, up 2 1/8.

More than 11,000 contracts in the April 206 puts were traded at 7 3/4, or $775 per contract, a move that would provide protection up to a 15% correction in the trust. In the nearer month, the March 200 and 210 puts were active, trading 2,340 and 2,560 contracts, respectively.

"There has been massive put accumulation in the Q, even though it is hitting new highs all the time," said Joe Sunderman, senior research analyst for Schaeffer Investment Research. The put/call ratio on the trust over the past three months is 7, meaning there are seven times more put contracts outstanding than call contracts. "From a contrarian viewpoint, it's good to see investors worried enough to hedge."

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Momentum darling Brocade Communications (BRCD), which has seen its stock more than triple since September, today was seeing some action as investors were selling puts as a way to get into this highflier.

Brocade saw 2,000 contracts in its out-of-the-money March 320 puts move today against open interest of just three contracts. The puts traded at 9 1/2 ($950), but it looked like the investor was selling them. Brocade's stock was up 16 1/2 to 338 today.

The investors' strategy may be to use the puts as a sort of limit order since, by selling the puts, he is obligated to buy the stock at 320 per share, a price at which he may be comfortable. And unlike a limit order, he gets to take some hefty premium.

If Brocade doesn't fall, the puts expire worthless and the trader can keep the $950 in premium he made on each contract.

The danger, of course, is that Brocade does fall to 320, the put-seller buys the stock at that level, and it continues falling.

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