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Alliance Data Systems (ADS) OTM puts active

Posted
7/15/2010 4:43:00 PM
By: Karla Yeh
Referenced Stocks:ADS;OTM

September put options were active in Alliance Data Systems Corp. (NYSE: ADS ) during morning trading ahead of the holiday weekend thanks to an investor who appears to have taken a moderately bullish stance on the credit services company.

At 10:45 a.m. EST, a block totaling 13,290 out-of-the-money ( OTM ) September 50 puts changed hands for $2.30 per contract , which was closer to the bid price when the trade hit the tape. These puts have gained 28 cents so far on the day and are trading with a 23-delta, meaning the options are trading lower than the delta level would suggest (according to the delta, the puts should be trading up roughly 40 cents). Additionally, implied volatility of the September 50 puts is roughly 54% compared to the stock's 30-day historical volatility of 38%. Current open interest in this line is just 125 contracts, indicating the investor opened this short put position to call for a floor in the stock around $47.70. If the stock is trading higher than this breakeven level, the investor will make money on this short put play. Maximum profits on this trade occurs if ADS is trading higher than the strike price (the investor retains the entire premium collected of $2.30 per contract). On the other hand, if ADS is trading below the breakeven price, the investor will lose money and continue to do so in direct relation to the stock's movement toward zero. If ADS shares are trading between the breakeven price and the strike price, this put seller will keep some, but not all, of the credit collected depending on where the stock is trading. This strategy allows for a potential 17% drop in the stock prior to September options expiration before the seller begins to lose money, which is why we consider this a moderately, not exceedingly, bullish play.

Shares of ADS dropped significantly during morning trading, and were trading down nearly 3% to $57.75 as of 11 a.m. EST. The company did not announce any news ahead of the long weekend, and the market expects the company's next earnings announcement around July 22.