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Alliance Data draws bearish position

David Russell (david.russell@optionmonster.com)

Alliance Data Systems hit an all-time high last week, and now the option paper is turning bearish.

optionMONSTER's Depth Charge program yesterday detected a massive put buy in the company, which runs consumer-loyalty programs. A single block of 10,000 December 110s were purchased for $0.70, dwarfing previous open interest of just 12 contracts and therefore new activity. The trade accounted for more than 90 percent of the overall contracts in the name and pushed total option volume to 14 times above average.

Puts lock in the price where investors can sell shares, so they offer insurance against a decline . Even if ADS remains above $110 through expiration, the contracts can appreciate to the downside because they'll get closer to being in the money . Given their cheapness to buy, they could also generate significant leverage from a pullback in the name. (See our Education section for more on how to use calls and puts rather than trading shares.)

ADS fell 1.74 percent to $173.58 yesterday. The stock peaked over $184 on May 28 and tried to bounce on Tuesday, but it continued to drop yesterday as the broader market declined. Its peak came less than a week after S&P 500 reversed from an all-time high of its own.

Management is scheduled to appear before the William Blair Growth Stock Conference on June 11, and volatility has already been gaining ahead of that event.

Puts outnumbered calls by a bearish 124-to-1 ratio in the session.

(A version of this post appeared on InsideOptions Pro yesterday.)

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