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August 1, 2013  Thu 4:14 AM CT

POT: SEE CHART GET CHAIN FIND STRATEGIES
Potash gave up ground again yesterday, and a large trade is positioning for further losses.

optionMONSTER systems show that a trader sold 10,000 January 25 puts for the bid price $1.13 and, seconds later, bought 5,000 January 28 puts for $2.32. Volume was above open interest in the 25s but below it in the 28s.

The trader could be rolling a short-put position to a lower strike and doubling the size, but it is far more likely that this is a new ratio spread that would generate a maximum profit with POT down around $25 at expiration. That spread cost the trader just $0.06, which is the amount at risk if shares are above $28, so this is a low-cost way of taking a downside position. (See our Education section)

POT fell 8.31 percent to $29 even, continuing to fall with other fertilizer names for the second day in a row. The stock was last down at $25 in March 2009.

More than 179,000 POT options traded yesterday, compared to a daily average of 31,390.
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Education & Strategy

Sweet Spot Exceptions

As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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