Big hedge dominates Stillwater trade
David Russell | [email protected]
optionMONSTER's Depth Charge monitoring system detected the purchase of 5,000 December 10 puts for $0.84 and the sale of 10,000 December 9 puts for $0.40. There was barely any open interest at either strike before the transaction appeared, indicating that these are new positions.
The trade cost $0.04 and will earn profit of 2,400 percent if the platinum stock closes at $9 on expiration. Gains erode below that level and turn to losses under $8. It's known as a ratio spread because twice as many contracts were sold as the number bought.
Shareholders often use the strategy to hedge long positions against a limited drop. They like this trade because it can generate significant leverage if shares decline, while also programming a buy order at the lower strike because of the larger position in the short puts. (See our Education section)
SWC rose 0.39 percent to $10.19 yesterday but is down 14 percent so far this month. Most of that drop occurred on Oct. 11, when management announced that it would dilute shareholders by issuing $300 million of convertible bonds. The stock has been consolidating below its 200-day moving average since, which could be leading some chart watchers to expect further downside.
Overall option volume was 5 times greater than average in the session, according to the Depth Charge. Puts outnumbered calls by a bearish 13-to-1 ratio.