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Lorillard Inc. Option Bears Eye a Retreat from Record Highs

Lorillard Inc. puts are trading at 12 times the intraday average pace this morning

by 7/11/2014 10:45 AM
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Lorillard Inc. (NYSE:LO) ran to a new record peak of $67.28 right out of the gate, amid new developments surrounding its now-confirmed merger talks with Reynolds American, Inc. (NYSE:RAI). At last check, though, the stock was up 5.2% to trade at $66.40. In spite of this, put volume has soared to almost 11 times the intraday average, with a number of speculators either betting on -- or hedging against -- a reversal of course over the next week.

Specifically, put players have targeted LO's July 65 strike, where 3,449 contracts have changed hands. Several mid-sized sweeps have crossed on the ask side, and volume outstrips open interest -- two indications new positions are being purchased. Based on the volume-weighted average price (VWAP) of $1.05, breakeven at next Friday's close, when the front-month contracts expire, is $63.95 (strike less VWAP). Gains will accrue on a move down to zero, while profit is capped at the initial premium paid, should LO settle north of the strike at expiration.

Considering Lorillard Inc. (NYSE:LO) has rallied nearly 45% since taking a sharp bounce off its rising 200-day moving average in mid-February, a portion of today's put activity could be of the protective kind. Regardless of the reason, these traders are willing to pony up for their bearish bets. At present, LO's Schaeffer's Volatility Index (SVI) of 45% ranks at an extreme high, looking back 52 weeks. In other words, from a volatility perspective, premium on the stock's front-month contracts has never been more expensive within the past year.


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