Buying Puts on SAP

Is the current flurry of activity with traders buying puts on SAP part of the greater EU economic picture or does it just have to do with issues internal to SAP. SAP ADR shares are currently lower and have been trending downward for about two months. The put to call ratio for January 2012 puts is three to one for the German software giant. SAP AG is the leader worldwide in developing application software. It sells as American Depository Receipts in the USA. SAP is current trading at just over $50 a share but the three to one put to call ratio is a strong indicator that traders expect the stock price to fall. Because SAP is a global company buying puts on SAP is a bit like betting on a worldwide economic downturn. Because it is a European company buying puts on SAP falls into the category of trading options on Euro Zone stocks in general.

The economic picture in the European Community is not clear. The southern tier nations have come near going into default on their sovereign debts. The risk of a breakup of the EU has driven stocks and the Euro up and down for the last couple of years. Now that the EU ministers have agreed to closer economic integration there may be light at the end of the tunnel. However, no one expects quick fix and a renewed recession in Europe could lead to a global economic downturn. Folks who are buying puts on SAP may be looking exclusively at Europe or at the bigger picture. However, a recession will likely hit SAP sales and stock price. The stock has traded between $50 and $68 a share in the last year and is at the bottom of that range and heading lower if the folks buying puts on SAP are correct. To a degree some traders may be simply hedging risk with options . Anyone who bought the stock nearly a decade ago bought at below $20 a share. They may still expect the stock to rise but do not want to get caught in a short term fall in stock price.

Although these may not be a good times for owning stocks these may well be good times for options trading . Buying puts or calls on a stock, provides investment leverage for the options trader. It also allows the trader to hedge investment risk. The buyer of an options contract is under no obligation to buy or sell the stock in question. However, if the price of the equity moves as expected the options trader can do so and profit thereby. The price of an options contract is significantly less than that of the stock in question. In chaotic times such as these traders take advantage of options trading in order to earn profits while limiting risk. Those buying puts on SAP expect the stock price to fall and will profit if it does. However, they have limited their risk in case of a rise in stock price to the price of the options contract.

More Resources