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

Lowe's trader builds highly bullish play

May 23, 2016

A combination trade is looking for more gains in the home-improvement retailer, which raised its outlook while beating quarterly estimates last week.

OptionsHouse

Premium Services

Education & Strategy

Timing the Trade

Both break outs and a break downs need to have a couple things happen before it is considered a confirmed break out or break down by technical definition!  The only problem is that in today's market where things move much more quicker than they did just a few years ago, two days could wind up being the majority of the expected movement, if not the whole movement.

View more education articles »