Looking at options in McDonalds (NYSE: MCD) and Caterpillar (NYSE: CAT) yesterday, we saw that intraday declines in the share prices of both companies caused puts to rise, and bullish investors in each name using that bounce as a chance to bottom fish by selling puts instead of buying stock.
Shares in the world’s largest restaurant company dropped $1.15, or 1.75%, to $58.72, while Caterpillar shares rose about 10 cents, to $38.57. The Dec. 50 put options in MCD traded more than 10,100 times versus current open interest of 622, according to ONN.tv’s Sidewinder report. The bulk of the puts traded in the first 90 minutes of the day for $2 when the stock was around $58.50. These puts eventually declined from that level and closed the day at 1.88. Implied volatility declined as the bulk of the volume was initiated by sellers. Implied volatility of the MCD Dec. 50 puts is 31, down from 32 at the close Friday night.
A customer also sold 20,000 CAT Aug. 30 puts at $1 around 12:30 p.m. EDT yesterday when the stock was around $37.80. As the day wore on, shares of CAT rallied up to close in the black. As the stock rose, the puts fell to close at 84 cents, down 16 cents on the day. The fact that these out of the money puts declined by more than the stock did is an intuitive way to understand that implied volatility fell because most of the volume was initiated by sellers. Yesterday’s closing price computes to an implied volatility of 56 for the CAT Aug. 30 puts, down from 60 at Friday’s close.
CAT did not release any significant news, but MCD was selling off because they announced that same store sales were up 2.8% for the month of May. This was less than analyst estimates of 3.8%. However, MCD managed to close well off of its intraday lows of $57.75.
Heavy put selling such as this does not mean investors should buy up MCD and CAT shares. Instead, it could suggest that the investors in question are not absolutely bullish on the names, but they might see a limit to how low the shares will go. The investor does not need the shares to rally to make money on these put sales, they just need the stocks to not close below the strike price at expiration by more than the premium they collected.
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