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Semiconductor concern Applied Materials, Inc. (AMAT - 10.54) was targeted by put writers on Friday, possibly thanks to a Goldman Sachs recommendation from earlier in the week. Specifically, the derivative strategists on Wednesday suggested selling October 10 puts on AMAT, citing rising implied volatility (IV) -- especially on the put side of the tape -- in the wake of escalating hedging activity among cyclical stocks. In addition, Goldman upgraded the equity to "neutral" from "sell."
However, premium sellers took a shorter-term approach to AMAT, as more than 6,000 puts traded at the June 10 strike. What's more, 80% of the front-month puts changed hands at the bid price, and put open interest skyrocketed by more than 4,500 contracts over the weekend, confirming our suspicions of sell-to-open activity.
By writing the puts to open, the sellers are expecting AMAT to remain north of $10 throughout the next few weeks. In this best-case scenario, the puts will expire worthless, and the sellers can retain the entire premium received at initiation -- which represents the maximum potential reward on the play.
At last check, IV on the June 10 put stood at 31%. For comparison, the equity's one-month historical volatility rests at 21.18%, suggesting the round-number puts are slightly more expensive than usual. From a broader standpoint, however, the security's Schaeffer's Volatility Index (SVI) of 30% stands higher than just 27% of all others taken during the past year, implying that AMAT's near-term options are still attractively priced, relatively speaking.
On the charts, the shares of AMAT have shed more than 12% so far in May, pressured lower beneath their 10-day and 20-day moving averages. However, the stock could find a foothold in the aforementioned $10 region, which hasn't been breached on a weekly closing basis since March 2009.