NEW YORK (TheStreet) -- Shares of BHP Billiton (BHP) - Get BHP Group Ltd. Report are still trading down, days after it disclosed its production report for the nine months ended March 31 and provided an inconclusive update on the SEC's investigation.
Put action during morning trading suggests at least one investor seems convinced the stock could hold its current level throughout the next few months.
BHP shares are currently down $1.13, or more than 1%, to $77.33 so far on the day, and the remainder of the sector is showing weakness without any specific news.
By 11 a.m. EST, several blocks totaling 4,500 out-of-the-money (OTM) August 75 puts changed hands for roughly $4.25 per contract, which was closer to the bid price at the time of the trade.
The OTM shares are home to current open interest of 621 contracts, indicating the majority of this action was initiated to open. Investors who sold these puts will make money if BHP shares remain higher than the breakeven price of $70.75, which is why we call this strategy a moderately bullish strategy because it allows for a possible 9% decline before investors begin to lose money.
If the stock does drop below the breakeven price, investors could incur significant but limited losses as the stock moves closer to zero. On the other hand, if the stock stays around its current level, investors could make a maximum profit of the premium collected, or $4.25 per contract.
-- Written by Jud Pyle in Chicago
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."