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Deere's Inflated Premiums Lure Option Sellers

Puts used to bet both bearishly and bullishly on DE

by 7/12/2012 11:22 AM
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Option players have taken an interest in Deere & Company (NYSE:DE - 77.28) in recent trading as the stock struggles to pick a direction. Approximately 14,000 put contracts crossed the tape yesterday, representing two times the average daily volume. As a point of contrast, around 5,400 calls changed hands, about 550 fewer contracts than expected.

It seems a portion of these option traders decided to pick their price on DE, and sold to open a number of out-of-the-money September 60-strike puts. All of the 6,828 contracts crossed the tape around the bid price of $0.41, and open interest soared by 5,925 contracts overnight. In short, new positions were created at this strike.

The nuts and bolts of this put selling strategy are pretty straightforward -- the traders will be able to pocket the full potential profit of $0.41 (the initial premium collected) as long as DE stays above the strike price through September expiration. Should DE fall below $60 over the next 10 weeks, investors have locked in the price they're willing to pony up for shares of the stock. Risk enters the picture once the stock tumbles 23% from its current perch, in which case the traders will begin to tally up losses with each step south of $59.59 DE takes.

One aspect of put selling that makes it an appealing strategy is that it takes advantage of a security's elevated implied volatilities. With implied volatility on the September 60 put currently resting around 13 percentage points above 20-day historical (realized) volatility, these put writers are able to pocket a heftier premium than usual.

Not all of the put activity during Wednesday's session came from neutral-to-bullish option traders, however. Traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) bought to open 2,609 puts yesterday, versus 603 calls, bringing the stock's single-day put/call volume ratio to 4.33.

In fact, put buying has been in fashion on DE in recent months, as evidenced by additional data from the ISE, CBOE, and PHLX. The equity's 50-day put/call volume ratio of 0.96 ranks in the 81st percentile of its annual range, suggesting that puts have been bought to open over calls at a faster-than-usual clip.

This wavering among put players is reminiscent of DE's technical trajectory. The stock's rollercoaster ride on the charts has resulted in a slight 5.1% year-over-year deficit, and a 0.2% gain in 2012. Further highlighting this activity is the equity's 160-week moving average, which contained an early June pullback in the shares.

At last check, DE was 1.2% lower in today's session to trade around $77.28.


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