Market Insights

Teradyne has been plunging for almost a year, and yesterday it had record options volume.

A single large transaction accounted for most of the activity in the company, which supplies testing equipment for semiconductors and robotics:

• Some 29,383 June 70 puts traded for $8.35.
• A matching block of October 55 puts traded at the same time for $4.75.

Volume was below open interest in the June contracts but not the Octobers. That suggests an existing position was closed in the near-dated options and rolled into the future.

Puts fix the price where a security can be sold. They can appreciate quickly when stocks decline, so investors often use them for risk management. Traders may also sell them to collect premium in return for accepting downside risk.

Teradyne (TER), daily chart, with select patterns and indicators.

There are two likely explanations of Monday’s transaction.

The more probable explanation is that an investor owned shares and previously held the June puts as a hedge. He or she may have exited the position and rolled down to the October 55s. The adjustment would have generated a credit of $3.60 and given an additional four months of protection.

It would also reduce time decay and price sensitivity:

• Theta went from -0.06 to -0.02.
• Delta went from -0.49 to 0.25.

As a result, they stand to lose less from the stock rebounding and have more time for further declines. See our article on Memory Tricks for options Greeks like delta for more.

The strategy could make sense because TER is trying to hold a potential support level from October 2022. That could make some chart watchers expect a bounce in the near-term.

The other possible explanation is that the investor previously sold the June 70 puts to earn a credit. He or she would have been sitting on losses and might have rolled to the lower strike to reduce their assignment risk.

Regardless, the transaction pushed total options volume in the stock above 60,000 contracts. That was the highest total in 29 years of TradeStation data.

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