Slack is getting slapped down, and options traders are betting on more pain

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Slack has its work cut out for it, options traders say

The software space is suddenly reeling.

The group was hit with a deluge of analyst downgrades and bearish sentiment Wednesday, and after a strong start to the year, the IGV software ETF that tracks it has stalled out completely since mid-July, plunging more than 6% in the last three months.

Established names like Workday, Oracle, Adobe, SAP and ADP have fallen during the period, as has a nascent tech unicorn: Slack.

The workspace messaging company has tumbled nearly 10% from the highs of its first day of trading in June, and options traders aren't betting on a turnaround any time soon.

"The most active contracts were the Nov. 25 puts. About 7,500 of those traded for about $3," Optimize Advisors President Michael Khouw said Wednesday on CNBC's "Fast Money."

"Now, I would point out that those are in-the-money puts, and there was some open interest coming in today. Normally, when you see this kind of a decline, you would expect to see that. Maybe people who own those puts look to sell them and try to monetize them," said Khouw.

As Khouw pointed out, Slack experienced more than twice its daily average options volume on Wednesday, leading him to believe that something interesting was going on.

"The open interest was only about 5,400 contracts, [the 25-strike puts] traded over 7,500 contracts, and many of those contracts were actually purchased," he said. "What might be going on here, is people who own the stock and think there's a chance it might rebound but are not willing to take any more pain might actually have been taking advantage of some of those put sellers."

These traders would be taking advantage of those sellers by purchasing puts against their long position, giving them some insurance on the downside.

"That synthetically puts them into a call position. In this way, if [Slack] does catch a bounce, they'll be able to get some upside exposure, but they're mitigating their downside risk if it does see further weakness," said Khouw.

Slack was trading 2.2% lower in Thursday's session.

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