Good Example of Long Put Spread on SanDisk Corporation (SNDK)

12/21/2009 11:22 am EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

SanDisk Corporation (SNDK) attracted a notable wave of put volume on Thursday, as traders on the International Securities Exchange (ISE) bought to open 4,466 of these bearishly oriented options (compared to just 1,335 calls that were purchased). After taking a closer look at the data, it looks like one pessimistic player was opening a long put spread on the chip issue.

SNDK price chartSeveral large blocks, totaling 3,140 contracts, crossed the tape recently on SNDK's January 2010 22.50 put. All of these blocks changed hands at the bid price, suggesting they were sold.

Simultaneously, three symmetrical blocks totaling 3,140 contracts traded at SNDK's January 2010 24 put. However, these puts changed hands at the ask price, indicating that they were purchased. At the time these transactions occurred, SNDK was trading squarely at $24.

In this bearish strategy, the trader is looking for SNDK to drop below $24 prior to January expiration, hence the purchase of the 24-strike puts. However, the speculator is not expecting a particularly sharp decline, so he sold an equivalent number of 22.50-strike puts. By doing so, he's effectively lowered both the cost of entry and the break-even point on the trade.

Click to Enlarge

In the best-case scenario, SNDK will finish exactly at 22.50 on January 15, when these options expire. This will allow the trader to reap the maximum potential profit on the purchased puts, while allowing the sold puts to expire worthless.

Currently, SNDK is defying these bearish expectations amid an upbeat day in the tech sector.

The shares were fractionally higher at last check, having earlier tagged a new 52-week peak of $25. However, the equity is hovering several points north of support at its ten- and 20-week moving averages, leaving room for a short-term pullback.

By Elizabeth Harrow of Schaeffer’s Trading Floor Blog

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