VIT – VanceInfo Technologies Inc. – The outright purchase of a put spread on the Beijing, China-based IT service provider indicates one options strategist is prepared in case the price of the underlying stock declines ahead of November expiration. The bearish put spread may be a hedge against potentially disappointing third-quarter earnings from the company when they report ahead of the opening bell on November 16, 2010. The large size of the spread may mean the trader is long shares of the underlying and aiming to lock in downside protection on a day when the rise in shares is helpful in cheapening put premiums. VanceInfo’s shares are currently up 2.00% to stand at $32.23 as of 11:45 am ET, but earlier the stock surged as much as 4.3% to touch an intraday- and new 52-week high of $32.97. The investor picked up 10,000 puts at the November $30 strike at a premium of $1.40 each, and sold the same number of puts at the lower November $25 strike for a premium of $0.25 apiece. The net cost of the transaction amounts to $1.15 per contract. Thus, the trader is prepared to make money – or realize downside protection – should VIT’s shares fall 10.5% from the current price of $32.23 to breach the effective breakeven point on the spread at $28.85 by November expiration day. Maximum potential profits of $3.85 per contract are available to the put player if the price of the underlying stock plunges 22.4% to trade below $25.00 by expiration. The 20,000 contracts utilized in the transaction represent volume that’s more than twice the 8,977 contracts of overall existing open interest on the stock. Increased demand for puts on VIT this morning helped lift the stock’s overall reading of options implied volatility 7.3% to 46.53% as of 11:55 am 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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