Options Trading News

October 25, 2012  Thu 12:20 PM CT

Lowe's is stalling near a six-year high, and one investor is nervous about a pullback.

optionMONSTER's Depth Charge tracking program detected the purchase of 2,500 December 32 puts for $1.39 and the sale of 5,000 December 30 puts for $0.66. There was barely any open interest at either strike before the transaction appeared.

It's known as a ratio spread because twice as many contracts were sold as the number purchased. That generates additional income, thereby lowering the cost of the trade and increasing their leverage.

Today's put vertical spread cost just $0.07 and will earn a maximum profit of 2,757 if the home-improvement stock closes at $30 on expiration. The investor will be forced to buy shares below that level, but the trader may be willing to do that if he or she already likes the name.

Portfolio managers often use ratio spreads as hedging strategies because they make money from a limited drop, while programming buy orders at discounted prices. The main risk is that the shares fall too sharply. (See our Education section)

LOW is down 0.96 percent to $31.98 this afternoon. It's up 24 percent in the last three months but seems to be hitting resistance around a level where it peaked in mid-2006. Housing-related stocks have been one of the strongest groups in the last year but are down today after existing-home sales failed to improve in September.

Total option volume in the name is about average so far today, with puts accounting for more than two-thirds of the total.
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