Options Traders Betting on Slowdown
Options traders have been bracing themselves for bad news from some of Wall Street's most reliable companies, said Rebecca Darst of Interactive Brokers.
Specifically, Darst noted heavy activity in puts on General Electric and Caterpillar , Dow components that also are part of the SPDR Industrial exchange-traded fund. Puts indicate trader expectations that share prices will fall.
Even though options volume this week has been significantly lower than last week, Darst said, the trading has been significant in that it has indicated "traders possibly positioning defensively for some disappointing earnings, or for a slowdown in demand. I think people are coming on board with this economic slowdown story."
Darst said traders were buying GE puts in the October contract at strikes of $28 and $30.
GE is the parent of CNBC and CNBC.com.
For Caterpillar, the November puts were at strikes as low as $55.
Elsewhere, options trading in Pilgrim's Pride was halted Wednesday after the stock tumbled nearly 40 percent ahead of the company's earnings. The company said after the bell thatit expects to report a "significant loss" in the fourth quarterand would not be in compliance with one of its debt covenants.
Darst said options traders displayed a belief that problems in the chicken industry were not isolated to Pilgrim's Pride.
"What we saw yesterday, as of the close, was implied volatility in both Tyson and Smithfield Foods setting new record highs, or at least the highest level in at least 52 weeks, involving spikes of more than 50 percent, and adding up to more than twice the historic volatility reading," she said.
Tyson saw heavy selling in $12.50 October calls, with November puts extending as low as $7.50, while Smithfield saw buying pressure in $15 October puts.
Disclosure information was not available for Darst or for her company.