Dell (DELL) investor boosts LEAPS puts volume

By
A A A

Last week, Dell (NASDAQ: DELL ) shares slid by more than 7% thanks to the company giving an outlook that Wall Street did not find too appealing. However, without any notable news on DELL today, at least one investor took the opportunity to boost put volume and collected premium on a moderately bullish play using the January 2012 options.

Dell shares climbed seven cents to $13 during midday trading, and are slightly outperforming the broader market so far on the day. Put volume is active in the January 2012 expiration month thanks to an investor who collected some premium for bull put spreads.

At 10:47 a.m. EST, 5,000 January 2012 12.5/10 bull put spreads changed hands for a net credit of 96 cents per spread. The January 10 puts crossed the tape for $1.36 cents per contract and were bought to open while the 12.50 puts changed hands for $2.32 per contract and were sold to open. This options action indicates the investor will make a maximum profit of the premium collected, or 96 cents per spread, if DELL shares are trading higher than $12.50 at January 2012 options expiration. If DELL shares are trading lower than the breakeven price of $11.54, this investor gives back the credit collected and could continue to lose money as DELL shares move down to $10.The maximum loss is capped at $1.54 if the shares are trading below $10.

A closer look at time and sales shows this investor sold the put spread and traded stock simultaneously, which turns this directional options bet into a delta-neutral volatility play. Around the same time that the options hit the tape, a block of 70,000 DELL shares changed hands for $13. It looks like the investor was more interested in betting on volatility instead of necessarily calling for limited downside during the next year and a half. This stock action translates to the number of shares market makers would have to sell to make this a delta neutral play. The 96-cent premium of the put spread with the stock trading around $13 equates to an implied volatility level of 47% in the 10-strike puts and 42% in the 12.50-strike puts. These implied volatility levels compare to the stock's three-month historical volatility of 38%. If this investor thinks that DELL will become less volatile, then collecting premium on an implied volatility of around 42% will make money for the investor if they are hedged daily until expiration.

The graph below illustrates the profit/loss profile of this bull put spread tied to a stock position. You can build your own visuals by opening a free virtual trading account today - I use the trading tools available to account holders each day to assess and manage risk in stock and option trades.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Options

Referenced Stocks: DELL

Jud Pyle

Jud Pyle

More from Jud Pyle:

Related Videos

Stocks

Referenced

Most Active by Volume

183,639,073
  • $42.32 ▲ 3.85%
82,623,623
  • $15.99 ▼ 22.79%
39,547,942
  • $119 ▲ 1.19%
32,107,751
  • $77.62 ▲ 2.63%
29,684,848
  • $10.60 ▲ 2.02%
27,615,309
  • $24.03 ▲ 0.38%
26,917,669
  • $31.10 ▲ 2.07%
26,464,306
  • $47.75 ▲ 0.59%
As of 11/26/2014, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com