$RXT bears rack up overnight profits

Bearish option traders are racking up fast profits on downside positions opened in Rackspace (RXT) yesterday, ahead of the company’s earnings report.

Yesterday on Feb. 22, Market Rebellion’s Unusual Activity tracking systems detected the purchase of 7,210 March $10 puts as part of a bearish roll for $0.40 with shares at $11.71. Volume was well above the strike’s previous open interest of 257 contracts, showing that this was fresh interest.

Those puts have traded up to $2.40 today, 6 times their purchase price. The stock declined 34.67% in the same time period, a large move but nowhere near that of its options on a relative basis.

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.

RXT was last at $9.15, lower on the day by 15.67%.