Put Buyers in Shoe-Related Names?

Collective Brands Inc. (PSS), whose subsidiaries sell shoes, did not announce significant news on Monday, but at least one investor took the opportunity to buy puts on the retailer ahead of the company’s earnings report.

More than 7,100 December 17.50 puts traded Monday versus open interest of 5,882 contracts. The bulk of these options traded Monday at 2:25 PM Eastern Time for about 45 cents per contract. The stock closed at $19.34, down 79 cents. The options closed at a price of 55 cents, which translates to an implied volatility of 70, compared with a 63-day realized volatility of 39.

But this put purchase is less about volatility, and more about the fact that PSS is scheduled to announce earnings results after the market closes tomorrow. Analysts are looking for the company to post results of 50 cents per share. It is noteworthy that open interest actually dropped modestly on the day at this strike, from 5,882 to 4,222 contracts. This means one side of the trade, either buyer or seller, was closing these puts. For those who took the long side of this put trade, the options will make money if PSS shares expire lower than $17.05.

Elsewhere in shoe land on Monday, we saw that in Skechers (SKX), more than 6,300 January 20 puts traded, versus open interest of just 686 contracts. Open interest expanded to 7,031 this morning. These out-of-the-money puts closed at a price of around 73 cents, up 13 cents on the day. That translates to an implied volatility of 51 compared to a 63-day realized volatility of 48. The stock closed at $22.08, down 40 cents on the day.

Given that the delta of these options is roughly 25, the options should have risen only about 10 cents. This suggests these puts were likely initiated by a buyer. Unlike PSS however, SKX does not have earnings coming up, as they just reported on October 21.

Both PSS and SKX are within 10 to 15% of their 52-week highs, which were reached in October, and both stocks are up more than 70% on the year. This rally and the pending earnings release by PSS could be the reason we are seeing heavy put action in these names. Put buying such as this does not mean investors should clean out their supply of PSS and SKX shares. But it is noteworthy that at investors are expressing bearishness or buying puts to hedge a long position in the stocks, most likely in anticipation of further downside.