Insurance giant MetLife (MET) is down 22 percent over the past year, lagging the S&P 500. One trader sees the company continuing to slide even lower.
That’s based on the September $42.50 puts. With 168 days until expiration, 3,004 contracts traded compared to a prior open interest of 109, for a 28-fold rise in volume on the trade. The buyer of the puts paid $1.18 to make the downside bet.
With shares trading at about $56.50, the stock is still within 10 percent of its 52-week low of $52.83. A drop to $42.50 would mean breaking to a new low.
That’s certainly possible. Insurance companies rely heavily on investments in safe assets such as bonds. But the valuation of bonds has been hit hard in the past year as interest rates have risen.
The drop in shares, even with an 11 percent rise in earnings last year, has taken the stock to less than 7 times forward earnings.
Action to take: Long-term investors may be interested in the company given its current valuation. However, it would be prudent to buy part of a position now to take advantage of any further market fears in the coming months. At present, shares yield 3.6 percent.
For traders, shares just dropped to their 52-week lows. Barring any further pain in the financial markets, shares should trade higher.
But the puts are an inexpensive form of, well, insurance against a further drop for financial stocks. That makes them a reasonable hedge trade now, with high-double-digit potential or better in a panic.
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.