El DuPont (DD) near-term put spread calls for 14% downside

By
A A A

Shares of El DuPont de Nemours & Co. (NYSE: DD ) are outperforming the broad-market strength so far during Wednesday's session without any notables news on the company. Near-dated puts, however, were active despite the lack of news to catalyze the moderately bearish options action. Heavy volume accumulated in the September 36-strike and 41-strike puts during today's session as part of a bear put spread.

DD shares climbed 76 cents, or nearly 2%, to $42.19 as of 2:15 p.m. EDT. The stock reached a 52-week high of $41.75 during the trading session on Aug. 2 following the chemicals company's better-than-expected earnings announcement. On July 27, DD announced earnings of $1.17 per share and beat estimates by 24 cents. In addition, the company raised its guidance for its fiscal 2010 year. While DD shares are hovering around its 52-week high, at least one investor expressed moderate bearishness and chose to open a bear put spread to call for at least 14% of downside during the next month and a half.

Around 12:22 p.m. EDT, a block of 5,000 September 36-41 put spreads changed hands for a premium of 99 cents per spread. The September 36 puts changed hands for 26 cents per contract while the September 41 puts traded for $1.25 per contract. The lower-strike puts traded at the bid price while the higher-strike puts crossed closer to the ask price at the time of the trade. This options action suggests the investor paid a total premium of $495,000 for the lot on a bet that DD shares will be trading lower than $36 at September options expiration.

Maximum gain on this bear put spread is $4.01 per spread, and occurs if the stock is trading below the short put strike at expiration. If the stock is trading higher than the long put strike at expiration, the investor loses the entire premium paid. Return on risk for this spread equals 405% at expiration.

Spread strategies such as this limit risk and reward, but also call for an increase in volatility throughout the near term. Implied volatility of the 36-strike puts is 35% and the 41-strike puts are trading with an implied volatility of 26% compared to the stock's 30-day historical volatility of roughly 30%.



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: DD

Jud Pyle

Jud Pyle

More from Jud Pyle:

Related Videos

Stocks

Referenced

55%

Most Active by Volume

76,000,541
  • $14.885 ▼ 1.49%
42,886,657
  • $56.65 ▲ 7.58%
39,387,344
  • $17.03 ▲ 0.12%
37,920,699
  • $3.459 ▼ 2.56%
34,399,051
  • $14.14 ▼ 3.81%
28,837,719
  • $100.888 ▲ 0.78%
22,527,159
  • $4.885 ▼ 1.31%
20,915,997
  • $98.81 ▲ 0.16%
As of 9/30/2014, 12:45 PM

Find a Credit Card

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