Thanksgiving week was slow in the options world, and today is similarly slow with the market trading marginally lower.
It seems like a good time to highlight a very popular options trade: Put-Writes (or Selling Naked Puts).
This morning a trader has been selling massive amounts of puts that expire in 2017. This strategy is also known as a Put-Write or Selling Naked Puts. Here are the details of this morning’s put sale:
Seller of 20,000 Wal-Mart (WMT) January 50 Puts (exp. 2017) for $2.05 (trader willing to buy 2 million shares at 50)
Seller of 14,250 Target (TGT) January 55 Puts (exp. 2017) for $2.10 (trader willing to buy 1,425,000 shares at 55)
Seller of 8,700 Kohl’s (KSS) January 32.5 Puts (exp. 2017) for $1.60 (trader willing to buy 870,000 shares at 32.5)
Seller of 84,000 Zoetis (ZTS) January 35 Puts (exp. 2017) for $1.25 (trader willing to buy 8,400,000 shares at 35)
I assume that these trades were all made by the same trader, and if the stocks do not close below the price of the puts the trader sold, he’ll collect $18,984,500 in January of 2017.
What’s interesting about these trades is that if you take Zoetis (ZTS) out of the mix, the trader is focusing on the retail sector, which has taken a beating in the last several months. While the trader may not be calling a retail sector bottom, he is betting that these stocks will not fall significantly lower.
This is a favorite strategy of many top hedge funds, and even a strategy Warren Buffett is known to use. For example, Buffett is almost always short puts on the overall market because he’s willing to collect an insurance premium that the market will not fall dramatically.
If you are not familiar with this strategy and want more information, here’s my options education piece on Selling Puts, which is posted on our website:
A Put-Write strategy is used when a rise in the price of the underlying asset is expected, or a significant decline is not expected.
This strategy is often used by traders who are willing to enter a long stock position in a stock at a lower price than the stock is currently trading at.
This strategy is the sale of a put at a specific strike price with the potential for loss until the stock hits zero. The maximum profit on this trade is the amount of premium received.
If I were to sell a put, and the stock went below my put’s strike price, I would be assigned 100 shares per put I’ve sold, thus making me long 100 shares per put sold.
For example, if stock XYZ is trading at 110 and I’m willing to buy the stock at 100, I could sell the XYZ 100 strike put for $1.
If the stock were to close above 100 at expiration, I would collect a maximum profit of $1 per contract sold … or $100 per 1 contract.
If the stock were to close at 99 at expiration, I would break even and be long the stock.
If the stock were to go below 99, I would lose $100 per contract sold per point below 99.