Longer-Dated Puts Boost Options Action in Palm

Palm (PALM) is due to announce earnings sometime in mid-December, and the technology company saw several retailers slash the price of its newest smart phone today. That news could have prompted investors to purchase downside protection in the stock.

More than 8,000 May 5 puts traded on expiration Friday versus open interest of just 253 contracts, indicating investors traded these options to open. Put buying activity pushed the implied volatility of these puts to 101. During midday trading, we saw two substantial blocks trade at 32 cents, near the ask price, suggesting more buyers than sellers. Bearish investors who bought these puts are expecting to make money if PALM shares drop way down to $4.68. PALM shares closed up 11 cents to $11.74, which means put buyers are looking for a 60% drop in the stock.

The May 5 calls are currently up four cents on the day, and have a delta of 6. That means that these puts should be relatively unchanged, but buyers have pushed their prices up more than the delta would suggest.

PALM shares rallied up to around $17 last month, and they are currently approximately 30% off their recent highs. This elongated rally could be the reason we are seeing heavy put buying in the name. Put buying such as this does not mean investors should clean out their supply of PALM shares. But it is noteworthy that at least one investor expressed bearishness or bought puts to hedge a long position in the stock, most likely looking for further downside.