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Option Bear Places Big Pre-Earnings Bet On AOL, Inc. (AOL)

A long put spread strategist is dominating AOL, Inc.'s options pits

by 5/5/2014 3:31 PM
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Option Brief: AOL, Inc. (NYSE:AOL) put volume is running at more than triple its intraday average rate this afternoon, as bearish betting heats up ahead of the company's first-quarter earnings report Wednesday morning. Accounting for the majority of the volume was a 1,500-contract long put spread that traded less than 30 minutes into the session.

Digging into the details, a block of 750 weekly 5/9 41.50-strike puts changed hands near the ask price at $0.90 apiece, while a matching lot of weekly 5/9 39-strike puts was exchanged near the bid price at $0.30 each. Data from the International Securities Exchange (ISE) indicates that the higher-strike puts were bought to open, and the lower were sold to open -- confirming our suspicions of a bear put spread, initiated for a net debit of $0.60 per pair of AOL contracts (which is the trader's maximum risk on the trade). This theory is corroborated by Trade-Alert.

Today's trader is anticipating AOL -- currently hovering at $43.58 -- will finish at or below $39 at the closing bell this Friday, at which point, the maximum potential profit of $1.90 (difference between the strikes less the net debit) would be realized. Meanwhile, breakeven on the trade is $40.90, or the bought strike less the net debit.

Looking ahead, today's bearish trader should potentially be concerned about AOL, Inc.'s (NYSE:AOL) upcoming appearance in the earnings confessional. The Internet pioneer has matched or bested analysts' bottom-line estimates in each of the past eight quarters, and averaged a gain of 5% in the subsequent session. Wednesday morning, the Street is calling for earnings of 45 cents per share from AOL, a roughly 10% improvement over the firm's year-ago results.


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