Put seller sees PetSmart holding

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PetSmart has been trending steadily higher for the last two years, and one investor apparently thinks that it will hold those levels.

optionMONSTER's tracking systems detected the sale of 2,500 April 35 puts for $1.05. The same number of January 35 puts were bought at the same time for $0.25 against existing open interest, suggesting that a short position was closed and rolled forward by three months.

PETM The transaction resulted in a net credit of $0.80 and will make money as long as the pet-supply retailer stays above $35 through expiration.

PETM rose 0.69 percent to $39.60 in morning trading and is up 48 percent since the beginning of 2010. Its last earnings report on Nov. 17 matched forecasts, but management issued strong guidance for the fourth quarter.

Investors often sell puts on stocks they like because it lets them earn income even if the shares fail to advance. The danger is that they will be forced to buy a stock at the strike price if it falls below that level. (See our Education section)

PETM's implied volatility is about 29 percent, significantly above realized volatility at 20 percent. That means its options premiums are overvalued relative to the stock's propensity to move, which also explains why an investor would chose to sell puts.

The trade pushed total options volume in the name to 32 times greater than average so far today.

(Chart courtesy of tradeMONSTER)



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.

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This article appears in: Investing , Options

Referenced Stocks: PETM

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