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Protective strategy behind Tekelec puts

As Tekelec attempts to lift itself from a nine-year low, one investor wants protection.

optionMONSTER's Depth Charge tracking system detected the purchase of about 1,600 August 7.50 puts for $0.50, while about 3,600 August 6 puts traded at the same time for $0.15. Volume was more than 5 times open interest at both strikes.

There are two possible interpretations of the activity, both bearish. One is that the August 6 puts were sold, in which case the trade was a ratio spread. That strategy uses the sale of more downside puts to generate income and to reduce the cost of owning the contracts that are closer to the money. Shareholders often use ratio spreads as a hedge on existing positions.

The second possibility is that the August 6s were purchased. That would be even more bearish because it would mean that the investor owns more contracts and paid more for them. (See our Education section)

TKLC rose 1.81 percent to $8.45 yesterday. The maker of telecom software lost more than one-third of its value in February after issuing a weak full-year forecast. Since then, however, it found support around $7.50 and in the last week started pushing higher.

Overall option volume in the company was 30 times greater than average yesterday, with puts accounting for a bearish 97 percent of the total, according to the Depth Charge.

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

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

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