Bears profit as Ambarella drops

Ambarella was caught in a wave of selling among semiconductor stocks today, resulting in huge gains on downside positions.

On June 1, Investitute’s market scanners identified the purchase of 3,000 June $55 puts for $1.45 to $1.50 with shares at $59.15. Open interest in the strike was only 390 contracts before the trades occurred, showing that they were new positions.

Those puts traded for $3.60 today, more than doubling in value. The stock declined less than 13 percent in the same period, illustrating how 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.

AMBA fell 4.84 percent to $51.73 today. The video-chip maker was trading above $60 before delivering poor guidance after Tuesday’s close.