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December 28, 2012  Fri 3:16 AM CT

DOW: SEE CHART GET CHAIN FIND STRATEGIES
A bearish spread targeted Dow Chemical yesterday as its shares held near resistance.

optionMONSTER systems show that a trader bought 2,500 February 20 puts for the ask price of $0.69 and sold 5,000 February 28 puts for $0.33. The volume at both strikes was significantly higher than the previous open interest, so this is a new vertical spread.

It cost only $0.03 to open the trade, which is also known as a ratio spread because one strike has twice the volume of the other. The position takes a maximum profit if shares are right around $28 upon expiration in mid-February. If the stock is below that level, the trader faces assignment on the additional short puts and the obligation to buy shares. (See our Education section)

DOW fell 0.93 percent yesterday to close at $32.12. The stock hit a 52-week low under $28 in mid-November but last week tested resistance at $33, its highest level since June.
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When using the Stock Replacement Strategy, we must remember that in reality, we are doing a STOCK trade. We are just using options. We are replacing the stock position with an option position (long calls).

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