By Jud Pyle, CFA, chief investment strategist for the Options News Network
) - Options action in
Adobe Systems Inc.
has not slowed since morning trading, and it looks like investors could be calling for limited upside throughout the later-term while simultaneously pushing down implied volatility.
Shares of ADBE are currently down roughly 27 cents to $34.75 without any specific news from the company today. The company just recently reported earnings back at the end of March, so they are not likely to report again until mid-June. Options action during today's session suggests investors expect less than 5% of upside in ADBE throughout the later-term, and even after the company's next earnings report.
By 1:30 p.m. EST, more than 7,100 near-the-money July 35 calls changed hands. The largest block, comprised of more than 4,000 of these calls, crossed the tape out of the gate for $1.82 per contract, which was just two cents higher than the bid price at the time of the trade. The July 35 calls are home to current open interest of 6,800 contracts.
We will have to wait for tomorrow's open interest data to see if the majority of the volume was to open or close. Investors who sold these calls will make money if ADBE shares do not climb higher than $36.82 prior to July options expiration, meaning this trade calls for a later-term ceiling. For this reason, shorting calls is a moderately bearish position and investors cap any gains at the premium collected, or $1.82 per contract. If the stock does climb higher than the breakeven, investors could incur unlimited losses.
The price of these July 35 calls has dropped 18 cents so far on the day, which is more than their delta of 50 would predict, indicating that implied volatility has slid. Current implied volatility of these calls is 27% compared to the stock's 30-day historical volatility of 20%. This type of a decline in implied volatility is a microcosm of what is going on across the options landscape, as a lack of movement in stocks is causing option players to sell premium.
Jud Pyle is the chief investment strategist for Options News Network 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."