Bears double money in $CPE

Callon Petroleum (CPE) is down sharply on merger news today, providing large profits on downside option positions.

On June 28, Investitute’s proprietary programs flagged the purchase of 4,000 July $7 puts for $0.65 to $0.70 with shares at $6.60. This was clearly fresh buying, as open interest in the strike was a mere 349 contracts before that session began.

Those puts traded for as much as $1.55 today, more than twice their purchase prices. The stock fell 16.52% in the same time frame, showing how options can far outperform moves in their underlying shares on a relative basis.

Long puts lock in the price where a stock can be sold no matter how far it might drop, gaining value in a selloff with the potential for significant leverage. The contracts can be purchased either as an outright bearish bet or a hedge on a long-stock position.

CPE is down 14.84% to $5.45 in midday trading. The energy producer announced this morning that it is acquiring Carrizo Oil & Gas (CRZO) in a $3.2 billion deal.