Options Trader Bets Big On a Deeper Dillard's Stock Drop

One speculator wrote calls to bring the cost of a Dillard's put position down to $1.17M

Department store operator Dillard's, Inc. (NYSE:DDS) has bounced back from its May-June lows around $56 per share, but the stock is now facing heavy resistance at the 200-day trendline. The moving average has capped multiple breakout attempts over the past year for the retailer, and now has the stock pulling back from the $68 mark -- home to its January highs.

Dillard's stock is modestly higher today, up 0.5% to trade at $64.66 after suffering a 4.4% drop on Wednesday. However, it looks like one options trader is betting on more short-term downside to come for the retail stock in the weeks ahead.

In the options pits, traders have been busy today. Currently, more than 2,300 calls and 1,700 putshave changed hands -- about three times the expected intraday volume. There's notable activity at the August 75 strike, where it appears that one bearish trader wrote calls to partially fund the cost of a new high-delta put position.

The trader looks to have bought to open 1,000 75-strike puts for $12.56 each, and simultaneously sold to open an equal amount of75-strike calls for $0.86 each. Thisspread was established for a net debit of $11.70 per pair of options ($12.56 - $0.86), or $1.17 million total (net debit x 100 shares per contract x 1,000 spreads).

Digging deeper, the trader will turn a profit if DDS is trading below $63.30 (bought put strike minus net debit) when the options expire on Friday, August 16. Because that 75-strike put is so deep in the money, it has a relatively high delta of negative 83% -- meaning it gains $0.83 in value for every 1 point the stock loses -- even a month out from expiration.

While options that behave this much like the underlying stock are expensive to buy due to their high proportion of intrinsic value, the trader in this scenario has trimmed the cost of entry somewhat by pairing the long put options with short call options. That said, writing the calls at the 75 strike also creates theoretically unlimited risk on an upside move, unless the options contracts are hedged by an appropriate number of DDS shares.

Dillard's is tentatively expected to report second-quarter earnings the week of August options expiration, which may have inspired this back-month trade. The stock has declined in the post-earnings session in each of the past five quarters, according to Trade-Alert, with the average one-day sell-off amounting to a steep 9.5%.