FTR – Frontier Communications Corp. – Two large-volume bearish debit put spreads were purchased on Stamford, CT-based Frontier Communications Corp., a firm that provides internet, television and other services to rural areas and small to medium-sized towns and cities, in the first 15 minutes of the trading session. Shares of the communications company are currently lower on the day by 1.40% to stand at $7.75 as of 10:45 am (ET). According to a Bloomberg article this morning, FTR sued Google Inc. for infringement of a new patent for enhanced telephone services. Perhaps the bearish activity observed on Frontier this morning is the work of investors fearing FTR’s shares may continue lower in the next couple of months. The puts spreads are identical in size and utilize the same strike prices in the July and August contracts. The nearer-term spread involved the purchase of 20,000 puts at the July $7.5 strike for a premium of $0.22 each, marked against the sale of the same number of puts at the lower July $5.0 strike for $0.02 apiece. The net cost of the transaction amounts to $0.20 per contract. Thus, the spread positions the trader to accumulate maximum potential profits of $2.30 per contract if Frontier Communications’ shares plunge 35.5% to trade at or below $5.00 by July expiration day. The investor starts to make money if shares slip beneath the effective breakeven price of $7.30 ahead of expiration. The 20,000-lot August $5.0/$7.5 debit put spread cost a net $0.40 per contract and yields maximum potential profits of $2.10 per contract if FTR’s shares fall to $5.00 by expiration day in August. The two spreads utilized a total of 80,000 put options, which is 2.4 times greater than the number of contracts of total existing open interest on Frontier of 33,223 contracts. The jump in demand for options on Frontier Communications Corp. bumped up the stock’s overall reading of options implied volatility 25.7% to 37.01% as of 11:00 am (ET).
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Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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