Most Popular DWAC Option Eyes a 95% Plunge Over Next Month ...

Carly Wanna, Bloomberg News

, Bloomberg

(Bloomberg) -- As share prices of the firm taking Donald Trump’s media company public soared on Monday, the most-popular option contract protects against the stock losing almost all of its value in just a few weeks.

While Digital World Acquisition Corp. soared 35% to $49.95, traders snapped up more than 15,000 of the $2.50 puts expiring April 19 — equivalent to 1.5 million shares, if the stock were to plunge 95% by then. While that kind of a bet is one possible rationale for doing that trade, there are other more likely reasons.

Read more: Trump-Tied SPAC Jumps 35% as New Firm Set to Trade Tuesday

Traders who bought the option likely don’t expect they will be able to exercise the put. But given the stock’s wide swings since mid-January, another dive lower could enable traders to sell the contracts they bought for 2-3 cents each for a few pennies more. 

Steve Sosnick, chief strategist at Interactive Brokers, put forward another, more prosaic theory — that some traders may have bought the put just to satisfy broker requirements around volatile stocks like DWAC. In such instances, brokers might bar traders from selling uncovered options. So traders can buy the cheap, far out-of-the-money put as a workaround — turning their naked volatility sale into a play with theoretically capped risk.

“It’s not a great hedge, but you might be able to fool someone’s risk management,” Sosnick said. “What’s going on now is clearly not happening because of plain old, vanilla, rational trading.”

Some 396,000 options contracts changed hands on Monday — nearly 10 times the average over the past month. Puts outnumbered calls, and implied volatility for one-month puts implying a 10% move rose more than calls, signaling some interest in covering against the shares falling back. 

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