By Jud Pyle, CFA, chief investment strategist for the Options News Network
Significant put activity hit the tape on
Tuesday morning after the company announced $2.4 billion in net proceeds from the completion of a common stock offering after the close yesterday. The bulk of the volume in the puts was initiated by a seller as investors bet that PRU is likely to be range bound with not much downside.
In morning trading, an investor sold more than 5,000 Sept. 35 puts at around $3.60 per contract with stock down around $39.60. These out-of-the-money puts have dropped 40 cents so far today and are home to current open interest of 1,570. The fact that the stock is down and yet the puts are still down is a practical example of how implied volatility has dropped to 69.5 so far today after closing at 75 yesterday.
Investors sell out-of-the-money puts when they see limited upside and limited downside in a stock. As more and more investors sell puts, implied volatility will decline, and you will continue to see the
CBOE Volatility Index
, or the VIX, decline.
Today's activity in PRU is almost identical to what we wrote about yesterday in
. In those two stocks we also saw out-of-the money put-selling. Investors who believe that this trend of declining volatility will continue are going to keep looking for puts to sell that are down at strike prices where they don't think the stocks will re-trace to.
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Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) 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."