Hewlett Packard Options (HPQ): Unusual Trading Activity

| May 22, 2012 | 0 Comments

HPQ OptionsOptions in computer device maker Hewlett Packard (HPQ) are showing large options activity.

With earnings season winding down, there are still a few big companies yet to report.  One such company is Hewlett Packard.   They’re scheduled to report Wednesday after the market close.

So today, we’re looking to see how option traders are positioning for HPQ.

This morning it looks like they’re a bit bearish.  In other words, traders are looking for a move to the downside.

Even though the market is slightly in the green today, HPQ is trading down a few pennies at $21.72 a share.

And already, one option trader has come in and has purchased over 3,500 put spreads.

He purchased the HPQ May $21 strike put options for $0.33 and sold the HPQ $20 strike put options for $0.17.  This resulted in a total cost of $0.16 a share.

Buying a put spread is a bearish options strategy.  It’s used when a trader believes the underlying stock is poised to move lower.

The strategy involves buying one put option and selling another put option on the same stock at a lower strike.  Since we’re buying a higher priced put, this position is done for a slight debit.

In this case, the trader’s making a smart and inexpensive bet that HPQ is going to move lower.

He’s spending a total of $45,500 to create his position.  If HPQ trades below the short strike of $20 before May expiration, the trader will make a profit.  The profit will be the difference of the strikes minus the amount paid for the trade.

On this trade, the maximum profit potential is $0.84 ($1.00-$0.16) per spread.  Since the trader bought 3,500 put spreads, he could pull down a total profit of $294,000.

Not bad for a few days work!

But why a play on Hewlett Packard moving lower?

As most of you know, Hewlett Packard is a leading provider of information technology products and services to businesses and consumers worldwide.

With the recent EDS acquisition, HPQ’s services will constitute about one third of consumer technology sales.  That’s similar to personal computers at 30%, but much higher than printers which account for 20% of revenue.

But here’s the real truth… I think this large put activity goes deeper that just analysts’ expectations for upcoming earnings.  HPQ has some serious headwinds ahead of them.

The PC business is facing declining yearly revenues.  And substitute technology products are squashing optimism for the expected short-term acceleration of PC refreshes.

In addition, data center giants like Cisco Systems (CSCO) are eyeing HP’s traditional markets as opportunities to steal market share.   And increased competition could bring additional margin pressure for HPQ.

Bottom line… HPQ may look strong now, but it’s obvious that option traders believe that could change in the very near future.

And with upcoming earnings, we’ll see if they’re correct.

For more detailed information on unusual options activity and how you can profit from it, be sure to sign-up for our daily newsletter, Options Trading Research.  It’s always 100% free and packed full of option trading ideas you can use immediately in your own portfolio.  Click here to subscribe for free.

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Category: Unusual Options Trading Activity

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.