Discovery Communications fell sharply after announcing plans to acquire Scripps Networks, handing downside traders huge profits.
On July 19, Investitute’s proprietary programs showed that 6,100 August $27.50 puts were purchased for $1 to $1.20 with shares at $27.36. This was clearly fresh buying, as open interest in the strike was just 1,001 contracts before that session began.
Those puts traded $3.25 today, tripling in value. The stock fell 10.1 percent in the same period, illustrating how options can far outpace 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.
DISCA slumped 8.21 percent to $24.60 today. The media company said this morning that it is buying Scripps Networks Interactive for $11.9 billion.