Option Traders Bearish on Permian Basin Royalty Trust; PBT, PVD, BTE

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Option Traders Bearish on Permian Basin Royalty Trust; PBT, PVD, BTE

Option traders are showing a bearish bias toward Permian Basin Royalty Trust (PBT). The implied volatility level for PBT calls is at 22.28, while the implied volatility level for PBT puts is at 26.46---giving the stock a volatility skew of .84.

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Any time we see a volatility skew below 1.00---like we are seeing for PBT---it is an indication that PBT puts are more expensive than PBT calls. Typically, when puts are more expensive than calls, it means the demand for puts is greater than the demand for calls because investors believe the stock is going to fall in the future and they want to take advantage of that movement by buying puts. The volatility skew for PBT is especially compelling because a reading of .84 shows that option traders are pushing prices to the extremes.

Seeing that PBT's volatility skew is showing a bearish bias, you may want to look at employing one of the following strategies:

- Buying a put

- Selling a naked call

- Buy a vertical put spread

If you are looking for other potential options trades that are similar to the ones you may be looking at on PBT, you may want to look at a few of the other stocks in the Diversified Investments industry. Oftentimes, stocks within the same industry group are affected by the same fundamental factors and tend to move together. Administradora de Fondos de Pensiones Provida SA (PVD) and Baytex Energy Trust (BTE)---which are both part of the Diversified Investments industry---may also be interesting to look at.

Of course, the volatility skew for PBT may only be showing a bearish bias due to forces that only affect this stock. In that case, you may want to look at doing a pairs trade---buying a call on one stock and buying a put on the other stock---between PBT and PVD or between PBT and BTE to hedge some of the risk you may take on by trading PBT alone.

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