Bearish option traders quickly turned exponential gains in tobacco company Altria this morning.
About 30 minutes into the session, Investitute’s tracking systems detected the purchase of 2,900 September 72.50 puts mostly for $1.12 with shares at $73.45. Volume was well above the strike’s open interest of 1,402 contracts, indicating that this was fresh buying.
Those puts shot up to $11.60 barely an hour later, a gain of more than 900 percent, as the federal government announced proposed regulations on cigarettes. The stock fell 13.9 percent at the same time, showing how quickly options can far outperform their underlying shares.
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.
MO ended the session down 9.49 percent to $66.94. Altria led other tobacco companies lower after the Food and Drug Administration released proposals to lower the amount of nicotine in cigarettes to curb addiction.