Auto parts chain store Advance Auto Parts (AAP) is down over 56 percent in the past year. One trader is betting on further downside ahead in the coming weeks.
That’s based on the March 15 $42.50 puts. With 31 days until expiration, 8,859 contracts traded compared to a prior open interest of 211, for a 42-fold rise in volume on the trade. The buyer of the puts paid $0.36 to make the bearish bet.
Advance Auto Parts shares recently traded for about $64, or about 33 percent below the current price. The strike price of the option is also well under the stock’s 52-week low of $47.73.
Revenues are up 3 percent for the store chain over the past year. However, higher costs have weighed on profitability, and Advance Auto Parts has not been a moneymaker.
Plus, the company’s debt has soared, and it now has more than 10 times as much debt as cash on the balance sheet. And Advance Auto Parts slashed its annual dividend from $3.50 to $1.00 per share.
Action to take: Shares are in a long-term downtrend and are likely to keep trending that way for the foreseeable future. The remaining dividend could also be at risk of a cut.
For traders, the March puts have just over a month to play out. While it’s unlikely that the trade will move in-the-money, further downside from here could mean a high double-digit return or better on the options.
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 company mentioned in this article.