Bears score as AutoZone hits brakes

AutoZone fell along with other auto-parts retailers today, resulting in huge gains for downside option positions.

On May 23, Investitute’s proprietary programs found that 1,350 October $580 puts were purchased for $24.40 as part of a bearish ratio spread with shares at $604.85. This was clearly a new position, as open interest in the strike was only 9 contracts before the trade occurred.

Today those puts went for $75.13, more than tripling in value. The stock has fallen about 14.6 percent in the same time frame, 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.

AZO dropped 9.6 percent today to finish the session at $516.83. The auto-parts company declined after rival O’Reilly Automotive reported weak same-store sales.