Traders are betting that a key Apple supplier could face trouble when it reports after the close Wednesday.
On Tuesday, put volume on NXP Semiconductors, which make communication chips for Apple, was more than six times its average daily amount. That was a result of what appears to be a large February 77.5/70/65 put butterfly trade.
Specifically, the trader executing this strategy sold 4,000 of the February 70 strike puts for $0.80 per share each, while simultaneously buying 2,000 of the Feb 77.5 strike puts for $3 per share and another 2,000 of the February 65 strike puts for $0.50 per share. The trade is most profitable if NXP falls to $70. The trade thus cost $380,000 to put on.
"When you trade a butterfly, what you're looking for is for the stock to migrate to that middle strike, to that short strike, which would be $70," explained CNBC contributor Mike Khouw.
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The bearish bet seems to be that NXP Semiconductors will disappoint when it reports earnings after the bell on Wednesday. Data compiled by FactSet shows the Street is expecting earnings of $1.32 per share on revenues of $1.515 billion for the fourth quarter of 2014. The stock ended Tuesday at $79.74 after a late-day rally from its previous close of $77.87.
Dutch-based NXP Semiconductors supplies chips for both Apple Pay and Google Wallet. The company was split off from Philips a decade ago and is up 70 percent in the last 12 months.
But despite the rally, traders appear to be signaling that it might be time to take profits. According to Khouw, put volume has been elevated since the stock soared nearly 50 percent from its October lows. A put contract allows a trader to sell a stock for a set price within a set time.
"This could have been one institution looking to adjust that position a little bit," Khouw speculated. "But right now, the options market is looking for a move of about 7 percent. That's surprising for a stock trading at a low multiple that has averaged less than a 4 percent move typically on earnings."
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