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Applied Materials, Inc. (NASDAQ:AMAT) puts traded at twice the usual rate yesterday, as speculators placed bets ahead of the company's Thursday evening earnings release. By the numbers, 19,000 puts were on the tape at the close, compared to 21,000 calls. AMAT's most active strike was the August 20 put, which saw a mix of buy- and sell-to-open activity, according to the International Securities Exchange (ISE).
Digging deeper, the volume-weighted average price (VWAP) for the puts was $0.13. Therefore, for the buyers to profit at front-month options expiration tonight, the shares must be sitting below $19.87 (strike less VWAP). Additional gains will be had on a move all the way down to zero, while the most the traders can lose is the initial cash outlay, should AMAT close above $20 this afternoon. Of course, with the semiconductor stock up nearly 20% year-to-date, a portion of the long puts may have been initiated by shareholders seeking to hedge against a post-earnings swoon.
Meanwhile, the put sellers want AMAT to remain above $20 through the end of today's session. If that happens, they'll retain the initial premium collected as their maximum potential reward. However, if the shares backpedal below the strike, the sellers could potentially face assignment and/or steep losses.
Fortunately for the put writers (and shareholders hedging with protective puts), Applied Materials, Inc. (NASDAQ:AMAT) is 5.5% higher out of the gate at $22.32, thanks to a fiscal third-quarter earnings beat and strong current-quarter guidance. Also, the shares received a price-target hike to $22 from $21 at Credit Suisse.