Discovery bears triple their money

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.