The OptionsHouse Hotlist scans for unusual option activity each trading day. The Hotlist is available for all OptionsHouse customers, including those with virtual trading accounts. Today, the Hotlist has flagged some interesting option trading activity in two retailing names.
Collective Brands PSS, best known for its Payless ShoeSource brand, has had a rocky week. The retailer missed earnings expectations by a hefty 13-cent margin on Wednesday evening and quickly saw Caris & Company lower its PSS target to $16 from $29 (speaking of hefty margins). This morning, the shares were downgraded to neutral from positive at Susquehanna, which has a 12-month price target of $23 on the shares.
PSS shares dropped more than 9% in yesterday’s session and have bounced back today amid a relatively strong market. The stock is currently trading at $12.80, up roughly 2.3% today.
One options trader in particular has gone bargain hunting in this name, choosing today to open a long-term bullish position on the shares. This trader created a split-strike synthetic long stock position by selling puts and simultaneously buying calls.
Specifically, he sold nearly 5,000 January 2012 10-strike puts for $1.75 apiece (near the bid price at the time) and bought nearly 5,000 January 2012 12.50 calls for $3.30 a piece (this was at the ask price). In sum, the spread traded for a net debit of $1.55.
As the chart below from my virtual trading account indicates, this spread moves in accordance with the underlying stock (at least outside of the range of the sold and purchased strike). At expiration in 17 months, gains are unlimited above the breakeven point of $14.05 (the call strike plus the $1.55 net debit).
Losses are dramatic below this level but theoretically limited to $14.05 (should PSS fall to zero). If PSS is trading between the strike prices at expiration, losses are limited to the premium paid. In the short term, the delta for this spread is 88, meaning it should gain 88 cents for every $1 increase in PSS shares (and lose 88 cents for every $1 decline).
Also getting some attention today is Dollar Tree DLTR, which has seen about 10,000 puts trade at the out-of-the-money November 40 put. This volume is trading on open interest of 11,860, making it likely that this might be a closing transaction. Several large blocks of these same puts traded in early August at prices ranging from $1.30 to $1.60.
Today a block of 9,900 puts traded at the ask price of 70 cents per contract ($693,000 in premium for the entire block). If these are in fact being bought to close, an investor is exiting their short put position, taking profits off the table as DLTR has rallied more than 12% since mid-August. Remember most options are closed prior to expiration. In this case, possibly well before expiration.
If DLTR were to have moved against this put seller, he would have significant risk down to zero. Risk on a short put is defined as the strike price less the credit collected. The maximum reward on a short put is 100% of the premium.
So we’ve got a bullish strategy on a stock that just plunged and a potentially risk-reducing play on a name that just tagged a new 52-week high. (We’ll be able to tell for sure whether these Dollar Tree puts were bought to open or to close when open interest is adjusted Tuesday morning).
Check out the Hotlist every trading day for a look at stocks seeing unusual attention in the options pits. Refer to this article for more information on Hotlist functionality.
Photo Credit: crazytales562
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