Put seller likes McDermott near lows
David Russell | [email protected]
optionMONSTER's tracking programs detected the sale of 3,600 May 10 puts for $0.90. Volume was more than 23 times open interest at the strike, indicating that a new position was initiated.
The trader is now obligated to buy shares for $10 if they close below that level on expiration. In that case the entry price would be $9.10 including the credit earned, a discount of 13 percent below its current level.
Investors sell puts when they like a stock but don't want to expend capital getting long. It has the benefit of costing nothing upfront and letting them make some money even if the shares don't rally. The downside risk is similar to owning shares. (See our Education section)
MDR rose 0.48 percent to $10.51 on Friday and is sitting near the same $10 level that's been support since the market crashed in the summer of 2011.
A large block of shares was purchased shortly after the puts were sold, likely the work of the dealer who bought the contracts. Owning the puts would make him or her short the name, so buying equity would return them to neutrality.
Total option volume was 7 times greater than average in the session.