Options Update: Merrill Lynch Hit with Heavy November Put Volume Merrill Lynch speculators pile into soon-to-expire November put options by Joseph Hargett (jhargett@sir-inc.com) 11/19/2008 1:40 PM Text Size Email a friend Print My Yahoo Add RSS Del.icio.us Facebook Reddit Newsvine Digg!Digg Mixx it Keywords: MER stocks options weekly Shares of Merrill Lynch (MER: View sentiment for MERsentiment, chart, options) have fallen more than 7% so far today, as the financial concern is suffering under a fresh wave of selling pressure amid a broad-market decline. Aside from the weak equities market and recent financial-sector news from Citigroup (C) and J.P. Morgan Chase (JPM), there appears to be little driving the stock's losses this afternoon. However, this lack of headline news hasn't stopped a wave of speculation from washing over the shares from options traders. Specifically, more than 52,000 MER puts have changed hands so far, outpacing the stock's average daily put volume by more than 7.5 to 1. Furthermore, this spike in volume has placed the shares on our Intraday Volume Explosion List. However, it was the more than 29,000 contracts that traded at MER's soon-to-expire November 10 strike that caught my eye today. Merrill Lynch option volume details The Anatomy of a Merrill Lynch Put Position If you keep close tabs on the options market, you know that November options expire at the end of this week. So, it came as quite a surprise to see such heavy November put volume on MER with just 3 days until expiration. Drilling down on MER's put volume, I noticed that the activity at the November 10 strike was considerably varied. Several blocks ranging from 100 to 300 contracts changed hands at the ask price or between the ask and bid price. There was 1 trade that drew my attention immediately, as it totaled a hefty 18,428 contracts. It was the earliest of the large block trades, and crossed the tape at a bid price of $0.29 just after MER breached support at the 11 level - near 10:44 a.m. Eastern time. Open interest at MER's November 10 put totals a mere 4,398 contracts, hinting that this large block trade could be the initiation of a sell-to-open put position. While I will be running with a put-selling theme this afternoon, readers should know that this large block trade could be institutional in nature. As such, the institution initiating the trade could have received a price break on the entry price, thus making a purchased put position appear to be selling activity when compared to the bid-ask spread. If the contracts were indeed sold, the total credit received would be $534,412 -- ($0.29 * 100)*18,428 = $534,412. Remember that a put-sell trader needs the shares to remain above the sold strike through expiration in order to keep the premium received. In this case, the trader needs MER to stay above $10 per share through the close on Friday. The shares are dangerously close to testing support at the 10 level today, but let's see if the stock's technical or sentiment backdrops provide any additional drivers for this trade. http://www.schaeffersresearch.com/commentary/observations.aspx?ID=89268