Dell Inc. (NASDAQ:DELL) put sale plays volatility

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Dell Inc. (NASDAQ: DELL ) shares are on the rise during Wednesday's trading session and outperforming the broad-market gains. Trading action on the tape suggests at least one investor expects the stock to maintain its current level, or not drop significantly, during the longer term.

Shares of the computer maker were trading up more than 2%, or 28 cents, to $12.18 as of 12:50 p.m. EST. The stock is just 3% off its 52-week low of $11.72, and put volume that has crossed so far on the day suggests an investor expects limited downside until February options expiration. DELL has not announced any notable news since its acquisition of software provider Scalent on July 1, and the market expects its next earnings announcement around Aug. 19.

At 11:28 a.m .EST, a block of 4,000 out-of-the-money (OTM) February 10 puts changed hands for 76 cents per contract, the bid price at the time of the trade. These OTM puts are home to current open interest of 95 contracts. This options action suggests the investor collected 76 cents per contract, or a total of $304,000 for the entire lot, to open these short put positions to call for DELL shares to be trading higher than $9.24 at February options expiration. Maximum profit on this short put trade is the credit collected, while maximum loss is limited to $9.24 in the unlikely event that DELL is trading at zero at expiration (the investor loses money in direct relation to the decline in stock price). If DELL shares are trading between the strike price and the breakeven price, the investor keeps some of the premium collected.


While this options action suggests an investor is expressing moderate bullishness on DELL, a closer look at time and sales indicates the investor tied this short put position to a short stock position, and collected $12.18 for 250,000 shares. This stock action translates to the number of shares market makers would have to buy to make this a delta-neutral play. The 76-cent premium for the puts with the stock price at $12.18 equals an implied volatility of 47% compared to the stock's 30-day historical volatility of roughly 40%. If this investor thinks that DELL shares will become less volatile, the selling the 10-strike puts on an implied volatility of 47% will make money for this investor if the position is hedged until expiration.



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

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