There's been a lot of chatter lately about a potential buyout for Palm Inc. (PALM), with various reports pointing to HTC and Lenovo as possible suitors for the parent of the Pre and Pixi smartphones. However, one long-term option trader on Monday placed a confident bet against a white-knight bid for PALM by opening a sizable, out-of-the-money put position on the equity.
Around midday Monday, a block of 6,500 contracts slipped across the tape on PALM's January 2011 2.50 put, which is currently out of the money by about three points. These puts changed hands at the ask price of $0.25, suggesting they were purchased.
In fact, by the end of the day, a total of 13,576 contracts traded on the January 2011 2.50 put, and open interest at this LEAPS strike surged overnight by 10,870 contracts -- confirming that new put positions were opened on Monday. Indeed, the International Securities Exchange (ISE) reports that options players bought to open 21,235 puts on PALM yesterday, compared to just 8,475 calls (or 2.51 times more bearish bets than bullish).
By purchasing puts on PALM's January 2.50 strike, in particular, traders are betting that the smartphone stock will backpedal below $2.50 per share by early 2011. With that major block of 6,500 contracts changing hands at a price of $0.25, the speculator needs PALM to fall south of $2.25 before he can start collecting profits.
With PALM's current 52-week low set at $3.65, these skeptical speculators are betting on major losses for PALM during the long term. Short sellers are also banking on additional downside, with short interest representing a lofty 39.1% of the equity's float.
Elizabeth Harrow is a senior equities analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.