NEW YORK (
) -- Although
did not announce any news Friday ahead of its earnings report, at least one investor bought longer-dated puts to protect against a possible slide in the stock.
More than 6,600 September 26 puts changed hands so far today versus open interest of just 21 contracts, indicating investors traded these options to open. The puts have gained 17 cents to roughly $2.40 so far today, and have a 34-delta. We know investors bought these puts because the options have climbed more than their delta would suggest (the calls should be trading up four cents).
In order to make money on this purchase, put buyers need DOW shares to close lower than $23.60. The puts have an implied volatility of 40, compared to a 30-day historical volatility of 37%.
If DOW shares drop significantly throughout the next couple quarters, the investor could choose to sell the puts back and book profits instead of holding on to them until September options expiration.
DOW shares, which reached a 52-week high of $31.66 a couple weeks ago, are currently trading at $28.56, a 7% decline from the high. The put-buying action during morning trading suggests investors are expecting at least a 17% drop throughout the next nine months.
Also, an investor, who could be long the stock expecting a pop up, are buying these puts to reduce risk exposure.
DOW is scheduled to announce earnings figures on Feb. 2. Analysts expect the report to show 11 cents earnings per share.
-- Written by Jud Pyle in Chicago
At the time of publication, Pyle did not have a position in the stock mentioned. 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."