Bulls raising a toast to Constellation
David Russell | [email protected]
optionMONSTER's Heat Seeker monitoring program detected the purchase of 30,000 February 37.50 calls for $0.80 and the sale of a matching number of February 42.50 calls for $0.05. Volume was more than 18 times the previous open interest at each strike, showing clearly that these are new positions.
The trade cost $0.75 and will earn a maximum profit of 567 percent if STZ closes at or above $42.50 on expiration. The strategy is known as a bullish call spread because it allows the investor to control a $5 move--in this case, between $37.50 and $42.50--for a fraction of the cost. (See our Education section for more on how options can be used to generate leverage.)
STZ is off fractionally at $35.60 in afternoon trading but has appreciated more than 80 percent in the last seven months. The initial move occurred in late June after the company acquired distribution rights to the popular Corona beer brand and was subsequently bolstered by two strong earnings reports.
Given how far the shares have moved into record territory recently, some traders may not want to pay full price in hopes of further gains. Using the spread allows the investor to get long at a fraction of the cost, thereby reducing the amount of capital at risk.
Total option volume in STZ is 12 times greater than average so far today, according to the Heat Seeker. Calls outnumber puts by a bullish 21-to-1 ratio.