OptionsHouse

Options Trading News

October 25, 2012  Thu 12:20 PM CT

LOW: SEE CHART GET CHAIN FIND STRATEGIES
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.
Share this article with your friends


Related Stories

LOW

Trader sells calls before Lowe's earnings

August 1, 2016

3,400 October 87.50 calls sold in one print for $0.73 against open interest of 522 contracts.

OptionsHouse

Premium Services

Education & Strategy

Dissecting a big institutional trade

This week's column will study a recent call ratio spread. We're not recommending using this strategy because it has potentially huge risk. But we can learn from this different use of options by a large institutional investor.

View more education articles »