By Jud Pyle, chief investment strategist for the Options News Network
Today we saw some big option activity in a stock that does not usually see all that much. The stock is
Leggett & Platt
. The company produces engineered components and products ranging from residential furnishings to industrial materials.
The February 12.5 puts have traded 20,000 times today vs. open interest of 0. In fact, the sum total of the open interest across all months and all strikes, calls and puts is a little over 30,000. One customer sold these puts for roughly 37 cents. That means he will make money if the stock is above $12.13 at February expiration, and will keep the whole 37 cents if the stock is above $12.50 at expiration.
This big sale of these February 12.5 puts spurred other options activity. The February 15 puts traded over 1,100 times, also against zero open interest. At one point today, those puts were unchanged on the day, even with the stock down over 20 cents. Stock down, puts down, a good indication that implied volatility is coming in.
So what might the investors motivation be for selling these puts? Well, for one, it is worth noting that LEG is scheduled to announce quarterly earnings Feb. 3. So this investor clearly has no fear of earnings sending the stock through his break-even price of $12.13. This might be reasonable because LEG preannounced results in mid-December. So the investor is taking advantage of high earnings option premium and selling it.
Another characteristic of this trade is that it shows that the investor is bullish, but not bullish enough to buy the shares. In fact, the investor might actually be thinking the stock will go lower than its current $14.20 level. After all, there is exposure to both the housing and auto industries. But the investor has confidence that the stock will hold the $12.50 level. So rather than buy the stock and absorb the risk of a potential slide, he sells the puts.
A put sale like this clearly does not mean that investors should run out and buy shares of LEG. But it does demonstrate that at least one investor is willing to make a sizable bet in the options market that the stock will hold the $12.50 level. It also is a great example of how some investors are putting on bullish positions where they don't need the stocks to go up; they just need the stocks to not go down dramatically.
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."