Annaly Capital Management (NYSE: NLY )
shares are relatively unchanged on the day Wednesday, but at least
one investor traded a hefty number of puts on a bet that the stock
could drop closer, or maybe dip all the way to its 52-week low
throughout the next month.
NLY is currently trading up roughly five cents to $16 without
any news from the company today. The stock has recovered since its
worse-than-expected earnings announcement on May 3 (the company
announced 62 cents a share, missing estimates by 10 cents), but
options action during afternoon trading suggests at least one
investor is calling for the stock to pull back throughout the near
term.
By 1:40 p.m. EST, more than 21,000 out-of-the-money (
OTM
) June 14-strike puts changed hands for an average price of 14
cents per contract. These puts are home to current open interest of
1,500 contracts, which indicates investors most likely traded the
options to open. The options are currently trading up four cents,
despite the stock rallying slightly as well. That is a good
indication of how a put buyer can cause implied volatility to rise,
since puts should not rise when stocks rise, unless implied vol
rises. The OTM June 14 puts have an implied volatility of 37%
compared to the stock's 30-day historical volatility of 29%. If NLY
shares are trading lower than the breakeven price of $13.86 when
June options expire, put buyers could make significant but limited
gains if the stock moves closer to zero. If the stock remains at
its current level or higher than the breakeven, the maximum loss on
this long put trade is the premium paid, or 14 cents per
contract.
For a visual of the risk/reward of this long put strategy, open
a free
virtual trading account
. I use my account each day to assess profit and loss territories
of stock and option trades I see cross the tape.
It's interesting we're seeing heavy put-buying action during
today's session following
significant put selling action
ONN.tv covered on May 7. On that day, amid the selling on Wall
Street, someone sold the October 15 puts for $1.25. Those puts have
now dropped below $1.10. It is possible that today's put buyer was
the same seller as on Friday, and is protecting some of the risk
from that put sale.