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Will ARM end up getting hammered?

David Russell (david.russell@optionmonster.com)

Chip maker ARM Holdings has been limping since its last quarterly report, and yesterday the bears attacked.

optionMONSTER's Heat Seeker tracking system detected heavy buying in the December 48 puts, with large blocks crossing early for $2.60 to $2.70. Volume surpassed 4,000 contracts by the end of the session, 9 times previous open interest at the strike.

Puts lock in the price where a stock can be sold, so they gain in value when shares fall. Traders use them to protect long positions or to speculate on a drop. They can also generate some nice leverage if the buyers get the direction right. (See our Education section)

That's exactly what happened yesterday. ARMH was trading for about $46.81 when the options traded, but the stock then pushed lower to close down 4.45 percent at $45.72. The puts, meanwhile, ratcheted higher by more than 25 percent to $3.40 by the closing bell.

While quarterly earnings and revenues beat expectations on Oct. 22, weak smart-phone demand hurt the company's royalty receipts. The stock fell sharply on the news and attempted to bounce, but it hit resistance at $48 and has been making lower lows and lower highs since.

Total option volume was slightly above average in the name, but puts outnumbered calls by a bearish 4-to-1 ratio.

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

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