STX – Seagate Technology – Reports of “excess channel inventory” plaguing hard disk drive manufacturers pushed rigid disk drive maker Seagate Technology’s shares down as much as 7.00% during the trading session to an intraday low of $13.31. Seagate’s shares are off 4.40% to arrive at $13.68 with roughly 20 minutes remaining in the trading day. One trader was properly prepared for the sharp reduction in Seagate’s share price, and appears to have rolled a previously established long put position down to a lower strike price today. It looks like the investor sold 10,000 deep in-the-money puts at the September $20 strike for a premium of $6.24 apiece in order to get long 10,000 in-the-money puts at the lower September $15 strike for an average premium of $1.98 each. It is difficult to tell how much the trader originally paid to buy the September $20 strike puts. But, after examining put open interest at that strike, it looks like the investor likely purchased the put options back around February 18, 2010, for approximately $2.65 in premium per contract, when shares of the underlying stock were trading at a volume-weighted average price of $20.37. Seagate’s shares are currently down more than 32.8% since February 18. If the investor did in fact purchase the September $20 strike put options at an average premium of $2.65 apiece back in February, today’s sale of the contracts at a premium of $6.24 each results in approximate net profits of $3.59 per contract. The subsequent purchase of 10,000 puts for a premium of $1.98 each at the lower September $15 strike today indicates the investor expects Seagate’s shares to continue to decline ahead of September expiration. Profits on the new long put position at the September $15 strike price accumulate if shares of the disk drive manufacturer decline another 4.8% from the current price of $13.68 to breach the average breakeven point to the downside at $13.02 by expiration day in September. Options implied volatility on STX is up 8.9% to 47.77% as of 3:50 pm (ET).
Affiliation: Interactive Brokers
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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