Calpine earnings news sparks put selling

The chief financial officer of electric utilities company Calpine Corp. (NYSE: CPN) on Tuesday said the company’s earnings before taxes were higher than forecast for last year. This positive news sparked heavy put selling in a longer-dated series as at least one investor bet on limited downside in the stock.

More than 65,000 January 2011 12.5 puts crossed the tape during today’s trading session versus open interest of just 253 contracts, indicating investors traded these options to open. The puts are currently trading down 28 cents to around $2.25 per contract with a 54-delta. The puts are trading lower than the delta would suggest, indicating the majority of the options action took place on the sell side. Implied volatility of the January 2011 12.5 puts is currently 38, compared to a 30-day historical volatility of 24.

Investors who sold these puts on a moderately bullish play are calling for limited downside in CPN stock, and will make money if the shares close higher than $10.25 at January 2011 options expiration.

CPN shares are currently trading up 11 cents to $11.30 on the day, and are trading roughly 23% off their 52-week high of $14.68 (the stock reached the high point on June 1). The company’s stock continues to rally following an upgrade from Barclay’s last night to equal-weight from underweight. It’s interesting that at least one investor is willing to cap his gain at $2.25 per spread if CPN shares at least hold their current levels, and do not dip more than 9% throughout the next year.