Frenzied stock trading of shares of Frontier Communications began Tuesday as bearish investors placed a record number of bets the company would lose more than a third of its value by August.

Nearly 87,000 “puts” on Frontier changed hands, which is 66 times the monthly average.  This form of derivative trading lets an investor sell stock at a pre-specified, fixed price within a limited time frame, even if the stock price crashes.  These “puts” are comparable to insurance policies, usually sought by investors who believe a stock is about to rapidly decline in value.

Almost all of the volume was generated in two major trades yesterday.  Investors bought July and August puts at the $7.50 level, which suggests at least some investors are betting Frontier stock will decline below that amount.  If it does, they can still sell shares at $7.50.  Frontier fell 17 cents to $7.69 in New York Stock Exchange composite trading Tuesday. It has dropped 1.5 percent so far this year.

Speculation about why the sudden pessimism about Frontier Communications was sprinkled throughout the financial press.

“The motivation for the trades could be outright bearish,” Caitlin Duffy, an equity options analyst at Greenwich, Connecticut-based Interactive Brokers Group told Bloomberg News. “But it could also be someone buying downside protection if they’re long with a large position in Frontier.”

One factor they may be forgetting is the recent completion of Frontier’s acquisition of Verizon landlines in more than a dozen states.  On July 1st, Verizon will spin off its entity New Communications Holdings Inc., created specifically for the tax-free sale, to Frontier.  In effect, Verizon shareholders will suddenly own between 66 and 71 percent of the shares of Frontier and Frontier stockholders will be left with the remaining 29-34 percent.

Should Verizon shareholders decide that Frontier could follow earlier Verizon spinoffs into financial disaster, they’ll want to dump their shares of Frontier stock as fast as possible, causing the share price to plummet.  Those investors buying “puts” may be guessing that is precisely what is about to happen, and they’re hedging their bets.