How bearish strategy is playing Xilinx
David Russell | firstname.lastname@example.org
optionMONSTER's Depth Charge tracking program detected the purchase of 5,000 September 30 puts for $1.26 and the sale of 7,500 September 26 puts for $0.25 yesterday. Volume was more than twice open interest at both strikes.
The strategy is known as a ratio spread because the number of contracts bought and sold had a 2-to-3 ratio. The extra premium from selling more puts helps reduce the cost basis and increases leverage, but it also adds nuances to the trade that don't exist for standard vertical spreads.
For instance, yesterday's trader paid $0.885 for each of the puts they bought. If XLNX closes at $26 on expiration, the spread will be worth $4 and will generate a profit of 352 percent. Below $26, however, the gains will erode because of the larger position in the short puts. Under $18, the position will start losing money.
Ratio spreads are often used as hedging strategies by investors who like a stock over the long run and would be willing to own more shares on a big drop. (See our Education section)
XLNX fell 0.33 percent to $30.63. The maker of programmable semiconductors is down 15 percent in the last six months despite consistently strong results.
Overall option volume in the name was 10 times greater than average, according to the Depth Charge. Puts outnumbered calls by 42 to 1.