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Trading is taking place at a breakneck pace in NVIDIA Corporation's (NASDAQ:NVDA) options pits today. In particular, roughly 45,000 puts -- or 24 times the intraday norm -- have changed hands. (By comparison, call volume consists of a relatively light 3,315 contracts.) The majority of the action is taking place at two out-of-the-money strikes: namely, the November 14 and 15 puts. Based on information from Trade-Alert, it's likely a single trader is responsible for most of the volume.
Specifically, a speculator traded around 20,000 contracts at each of the strikes, which both came into the session with open interest of approximately 1,650 contracts. In other words, it appears that the two sets of puts were freshly initiated. However, those at the lower strike crossed the tape primarily at the bid price, while those at the higher did so nearer to the ask price. Hence, the block trader created a long (or bear) put spread by selling to open the November 14 put for a volume-weighted average price (VWAP) of $0.14, and buying to open the November 15 put for a VWAP of $0.39, for a net debit of $0.25 per pair of contracts.
In order for this bear to profit, he needs the shares of NVDA -- currently hovering at $15.57 -- to fall below $14.75, or the upper strike less the original net debit. The speculator would then profit with each successive step downward, until the underlying hit $14 -- at which point, the maximum profit potential of $0.75 (difference between strike prices, less the net debit) would be achieved. If the graphics titan stalls north of the higher strike, however, the most the trader has on the line is the net debit paid at initiation.
Technically, NVIDIA Corporation (NASDAQ:NVDA) has been on a tear, tacking on over 25% during the previous six months, and touching a 52-week high of $16.10 last week. Therefore, it's possible the spread strategist is a shareholder who's seeking some short-term downside protection, and selling the lower-strike put to offset the cost of the higher.
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