CHICAGO (TheStreet) --Although Linear Technology (LLTC) did not announce any news Tuesday, and the stock is relatively unchanged on the day, ut action during afternoon trading suggests at least one investor anticipates shares of the circuit producer to drop throughout the later term.
LLTC is current up 11 cents to $31.24 the day after Piper Jaffray published a note that said semiconductor companies will experience difficulty in driving shares higher during the short term. After dropping more than 1% on Monday, the stock has since recovered slightly, but at least one option investor doesn't expect the stock to run any higher.
At 12:59 p.m. EST, more than 5,000 out-of-the-money (OTM) November 29-strike puts changed hands for a premium of $1.90 per contract, which was the ask price at the time of the trade. These puts are home to current open interest of just 45 contracts, indicating the majority of the volume was initiated to open.
Investors who bought these puts will make money if LLTC shares drop below $27.10, which represents a 13% decline from the stock's current level. Theoretically, investors could make significant gains as the stock moves toward zero. On the other hand, if the stock rallies and stays higher than the breakeven price, this long put trade caps any losses at the premium paid, or $1.90 per contract.
Implied volatility of the November 29 puts is 29% compared to the stock's 30-day historical volatility of 26%. The puts are currently unchanged on the day. Remember if the stock drops significantly, investors could choose to sell back the puts and take profits instead of holding them for the entire seven months until November options expiration.
-- 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."