Yesterday, the opposite occurred as traders purchased almost 8,000 January 10 puts, looking for downside. They initially paid $1.15 and $1.20 but later as much as $1.35 after the shares edged lower.
PCS ended the session down 6.39 percent at $8.79 after slamming into resistance at its 100-day moving average. The company is still licking its wounds after customer defections caused earnings to miss estimates in August and November.
Calls fix the price an investor must pay to buy a stock, but they are much cheaper than the shares because they represent only the right to buy them. Puts are just the opposite, locking in a minimum exit price and representing the right to sell the shares for a given amount, no matter how low they go.
Investors use these instruments to manage risk and to speculate on price changes. They can provide significant leverage if a stock moves in the right direction, but also end up worthless if it doesn't.
Overall option volume in the name was six times greater than average yesterday, with puts accounting for 88 percent of the volume.
—Russell has no positions in PCS.
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David Russell is a reporter and writer for OptionMonster.