Shares of supplemental insurance company Aflac (AFL) are up 27 percent in the past year, fueled in part by a strong rally in recent weeks. One trader sees a pullback in the coming weeks.
That’s based on the December $70 put. With 24 days until expiration, 2,539 contracts traded compared to a prior open interest of 101, for a 25-fold rise in volume on the trade. The buyer of the puts paid $1.33 to make the bearish bet.
Shares recently traded for about $71, so the option is about $1 out-of-the-money.
The company has had mixed results in the past year. Earnings have improved by 80 percent, but revenue is down 8 percent, partially driven by the strength of the US dollar.
Action to take: Shares are still somewhat inexpensive at 9 times forward earnings. But in the short-run, the stock is overextended. Patient investors should wait until the stock is in the mid-$60 range or better. That will also give investors a starting dividend yield closer to 2.5 percent.
For traders, the puts are an inexpensive way to bet against shares following their strong rally in the recent weeks. The option can potentially return high-double-digits so long as there’s a drop in shares. On a drop, the stock is likely to drop back to a range in the low-to-mid $60s.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.