Puts gain 500% as L Brands drops

L Brands fell sharply on weak sales today, handing huge profits to bearish option traders.

On June 28, Investitute’s proprietary programs identified the purchase of 6,000 July $52.50 puts for $1.05 as part of a bearish spread with shares at $54.41. Open interest in the strike was only 1,641 contracts before the trade appeared, showing that it was a new position.

Those puts sold for $6.32 today, a gain of more than 500 percent in a little more than a week. The stock fell 15 percent at the same time, illustrating 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.

LB plunged 14.08 percent to $46.49 today. The retailer, whose brands include Victoria’s Secret and Bath & Body Works, reported this morning that same-store sales were down 9 percent in the five weeks ending July 1.