Here’s When Puts Aren’t Bearish: Options Recap

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Put volume is often used as a measure of bearish sentiment. But sometimes it can mean just the opposite.

Just look at global mining giant Vale (VALE), which came into the session riding a 15 percent rally in the preceding month. Less than an hour into the session, a traders sold 20,000 January 2020 12 puts for $1.35 and bought an equal number of January 2020 15 puts for $2.77. Volume was below open interest in the 12s, which suggests an existing position was closed and rolled higher.

Puts fix the price where a security can be sold, so investors can use them to protect their stocks against a drop. That seems to have happened today. Say the trader had 2 million shares and wanted a hedge. They could have bought puts at the 12 strike when VALE was lower — perhaps in late March. Now that it’s run higher he or she replaced them with new contracts that are closer to the money.

They paid a net $1.42. In return, they raised their protection level by $3. It’s almost like a trailing stop that lets them sleep more easily at night with a large holding. See our Knowledge Center for more on using options to manage risk.

VALE surged 1.7 percent to $15.17 in midday trading, and is back to levels last seen in April 2014. The iron-ore producer has been rallying along with other basic-metals companies as investors look for a strong global economy to lift the sector. Click here for more.

Overall option volume in VALE is more than twice the daily average in the last month, with puts accounting for more than two-thirds of the total.

Disclaimer: Options trading may not be suitable for all investors.

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David Russell is VP of Market Intelligence at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.