By Jud Pyle, CFA, chief investment strategist for the Options News Network
did not announce any news today, but at least one investor appeared to take a bearish stance on the company and bought puts calling for near-term downside.
SRE shares lost 11 cents to close 44.96 today, but slightly outperformed the broad-market losses on the day. The energy utilities provider did not announce any news on Wednesday, and the market anticipates its next earnings release around July 29. Put volume has been on the rise all day thanks to investors who could have expressed bearishness on the company and bet on new lows throughout the next couple of months.
By afternoon trading, more than 10,500 out-of-the-money (OTM) July 40 puts had crossed the tape versus current open interest of just 600 contracts, meaning investors most likely initiated the action to open. We saw a big block totaling roughly 9,000 contracts cross at 12:21 p.m. EST. A look at time and sales shows investors traded the July 40 puts for an average price of 75 cents per contract, which was right at the ask price when the trade hit the tape.
This options action suggests investors are betting SRE shares could drop at least 13% prior to July options expiration - if SRE drops lower than the breakeven price of $39.25, investors could make money as long as the stock moves toward zero. If SRE stock remains higher than the breakeven price, this long put trade caps maximum loss at the premium paid, or 75 cents per contract.
The investors who bought these puts are most likely protecting against a slide in SRE shares during the next couple months, and are willing to risk 75 cents per contract to bet on downside. If the price of the puts appreciates with or without a drop in the stock, the investor could choose to sell back the options and take profits instead of waiting until expiration.
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."