Bearish Activity in Dell Options Before Earnings

by riskreversal January 31, 2011 11:27 am • Commentary

[private][private]DELL puts have seen some bearish activity of late. The company is expected to report their fourth quarter earnings on or around February 15th (company hasn’t officially conformed the date), but already investors are lining up for protection. If earnings come before Feb Expiration (Feb 18), the options market is implying about a 4% move post earnings, which is about in line with the trailing 4 qtr avg of approximately 4%.    From Bloomberg:

The ratio of outstanding puts to sell Dell stock versus calls to buy reached 1.1-to-1 last week after January contracts expired, rising to the highest level since November 1998…

Investors created more new positions in February $13 puts during the two weeks ended Jan. 28 than any other Dell contract, according to data compiled by Bloomberg. Open interest jumped by 43 percent to 28,821, and they are now the most widely owned Dell contracts, the data show. The January 2012 $12.50 puts have the second-largest open interest, at 28,416. The shares fell 2.2 percent to $13.15 on Jan. 28.

This will be something to keep an eye on. It’s very possible that these puts are protection for investors that are looking to get into Dell stock at a depressed valuation.

“As the market has rallied, we’re seeing managers buying cheap puts for downside protection,” said Bob Fitzsimmons, chief executive officer of ITG Derivatives, a Chicago-based brokerage unit of Investment Technology Group Inc. “In the case of Dell it has been hovering around recent lows, and I think people have been relatively nervous.”

The notion that this activity could be a hedge makes sense, after all:

Dell is forecast to report fourth-quarter earnings of 37 cents a share excluding some items in February, according to the average of 30 estimates in a Bloomberg survey. It has beaten per-share profit estimates for the past four quarters, Bloomberg data show.

The PC maker trades for 11.1 times earnings from the past year, 27 percent less than the S&P 500.