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Alcatel Lucent SA (ADR) (ALU) Option Buyer Bets On a Drop

Is Friday's put buyer an Alcatel Lucent SA (ADR) shareholder looking for protection?

by 2/24/2014 9:26 AM
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Option Brief: Alcatel Lucent SA (ADR) (NYSE:ALU) has more than tripled in value over the past year, but has spent the past few months consolidating atop its 80-month moving average, and now rests at $4.26. However, one option trader is either "insuring" a long stock position against a short-term decline, or is hoping to profit from a notable drop in the shares.

Around midday on Friday, the trader picked up a block of 18,750 March 3.33 puts at the ask price, suggesting they were bought. Plus, open interest at the newly front-month strike skyrocketed over the weekend, hinting at fresh initiations.

If the buyer's goal is to protect his ALU shares, the puts lock in an acceptable exit price ($3.33 per share), should the equity breach this strike within the next four weeks. However, the protective put buyer is a shareholder above all else, meaning he's still hopeful ALU will resume its longer-term uptrend.

If the buyer is simply a "vanilla" option bear, he is hoping for a significant short-term pullback on the charts. From ALU's current perch, it would take a retreat of 21.8% in order for the puts to move into the money. The option's delta rests at 0.069, implying a less than 7% chance of the contracts finishing in the money at expiration on Friday, March 21. However, should Alcatel Lucent SA (ADR) (NYSE:ALU) remain north of the strike through the options' lifetime, the most the buyer will sacrifice is the initial premium paid for the puts. What's more, the equity's Schaeffer's Volatility Index (SVI) of 54% sits just 14 percentage points from an annual low, suggesting ALU's short-term options are attractively priced, relatively speaking.

Over the weekend, ALU announced a partnership with Intel Corporation (NASDAQ:INTC). The companies will be working to develop new cloud computing and security technology.


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