How trader is hedging Family Dollar
David Russell | firstname.lastname@example.org
optionMONSTER's Depth Charge tracking program detected the purchase of 2,500 October 62.50 puts for $2.28. Equal-sized blocks were sold in the October 60 puts for $1.19 and the October 57.50 puts for $0.64, lowering the trade's cost to just $0.45.
The trader now stands to earn a maximum profit of 456 percent if the discount retailer closes between $57.50 and $60 on expiration. If it is below $57.50, he or she will be forced to buy shares.
Known as a bearish "Christmas tree," the strategy is often used by investors looking to hedge long positions in a stock because it provides significant leverage to the downside. It also lets them buy more shares at a lower price, which they might be willing to do if they already like the name. (See our Education section for more ideas on how options can be used to manage risk.)
FDO rose 0.57 percent to $63.35 yesterday but has been drifting lower since hitting an all-time high above $74 back in June. Some chart watchers may expect the shares to hold support around $60 because it was resistance late last year, which would help explain yesterday's trade.
Overall option volume in the name was 13 times greater than average in the session, with puts outnumbering calls by 19 to 1.