Put-Buying in Digital Realty Trust

An investor buys out-of-the-money puts calling for later-term downside in Digital Realty Trust.
By Jud Pyle ,

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

Investors expect real estate investment trust name

Digital Realty Trust

(DLR) - Get Report

to announce earnings of 76 cents a share on Feb. 25 before the market opens, and at least one investor bought out-of-the-money puts calling for later-term downside in the stock.

Shortly after 10 a.m. EST, we saw several blocks of the July 40 puts cross the tape at an ask price of around $2.05 per contract. Investors who bought these puts need DLR shares to close lower than $37.95 at July options expiration in order to make money on this trade. But if the stock drops significantly throughout the next five months, investors could choose to sell the puts back and book profits.

The July 40 puts have traded more than 5,600 times vs. current open interest of 103 contracts, indicating investors traded these options to open. Implied volatility of the July 40 puts has climbed to around 40, compared to a 30-day historical volatility of just 18%.

Shares of the commercial real estate company are currently trading up 10 cents to $48.10. The buying action in these puts has actually caused the puts to rally on the day, despite the increase in the shares.

Stock up and puts up? That is an intuitive way to understand that implied volatility is rallying. Heavy put-buying such as this is not the only case for investors to sell DLR shares, but it is interesting that investors (who could be long stock) are looking to purchase downside protection.

DLR is involved in the commercial real estate space, and given the continued chatter in the market that commercial real estate might be the next shoe to drop, it is understandable why investors might be seeking some longer-dated protection.

Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.

Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."

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