Insider Buyer Loses Wild Bet

Do you remember your Trade of the Day from April 17?

I was skeptical about a “lone wolf” buyer of Lam Research Corporation (Nasdaq: LRCX) puts.

Here’s a quick refresher…

Does somebody know something about Lam Research Corporation that’ll send the shares lower by April 26?

The reason I ask is because last Friday, around 1:30 in the afternoon, someone stepped in and paid $500,000 for 500 of the Lam Research April $200 puts (the weekly series expiring April 26). These puts were bought on the ask for $10 when the stock was trading for $194.10. Could this be a directional earnings play?

This appears to be a lone wolf trader playing the odds that Lam Research won’t be able to move up four earnings reactions in a row. Maybe they’ll be right – and maybe they’ll be wrong. But to my eye, unless they have some sort of insider information, this looks like a 50-50 proposition.

Now let’s fast-forward to last week…

As it turns out, my skepticism about this put trade was right.

Line graph - Lam Research Corporation Daily

Look at this chart and you’ll see that Lam Research moved aggressively higher in reaction to earnings. As a result, our so-called lone wolf got crushed.

As of last Friday, these puts (which were purchased for $10) were trading midday for $0 (no bid) to $0.03. Not only that, but more than 500 contracts traded last Friday.

Now, I cannot guarantee these were the same 500 puts that this buyer bought for $10. But there’s a very good chance this was indeed the case.

If so, that’s how to lose half a million dollars in eight days!

Action Plan: As a trader, I know better than to go against the most powerful adage in all of trading, “The trend is your friend.” I outlined for you, in real time, just what happens when someone tries to swim upstream against this metric – and the result speaks for itself. Always recognize and respect the trend, no matter how logical your rationale is for going against it.

Let’s learn from the mistakes of others – because being half a million dollars poorer in eight days is no fun!

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