The largest options trade of the day so far was a block of 84,000 Zoetis (ZTS) Jan2017 $35 strike puts sold to open at $1.25 when the stock was $46.72.
Very simply, the put seller will receive $10.5 million in premium if the stock is above $35 on Jan2017 expiration, nearly 14 months from now.
The worst case scenario is that the stock is down nearly 28%, below $33.75 ($35 strike less the $1.25 premium) on Jan2017 expiration, then the trader will start to lose money as if they are long 8.4 million shares of stock.
In the near term, on a mark to market basis this position will lose money (the puts will increase in value) as the stock moves closer to the short put strike, or lose value (be profitable) if the stock moves higher. Given how long dated the expiration is, the puts should not see significant decay anytime soon.
I suspect this is a leverage trade for an existing long holder.
Taking a quick look at the large holders it appears that Bill Ackman of Pershing Square (yep the guy long a ton of Valeant, and short a ton of Herbalife), is the largest holder with nearly 42 million shares.
This trade caught my eye for two reasons. First its size. Prior to today, there was only 73,000 contracts of total options open interest. So this trade is massive in the name. Second, the Jan17 35 puts have a 14 delta. The options market is saying that these puts have less than a 14% probability of being in the money on Jan17 expiration. It’s also interesting to see positioning in long dated relatively low delta options, which leads me to believe this is an investor leveraging a long.
In sum, regular readers know that we place little emphasis on unusual options activity, and rarely if ever chase it. But in the m&A environment we are in as it relates to pharma and biotech stocks, it’s interesting to see how large investors are using options to leverage, protect or add potential yield to positions.