Spread braces for downside in Rackspace
David Russell | firstname.lastname@example.org
optionMONSTER's Depth Charge tracking program detected the purchase of 2,000 May 47.50 puts for $1.92 and the sale of 4,000 May 45 puts for $1.09. Volume was more than 11 times open interest at both strikes, indicating that new positions were initiated.
The trader collected a credit of $0.26 and stands to earn a maximum $2.50 if the cloud-computing stock closes at $47.50 on expiration. Below that level they will be forced to buy shares.
Known as a ratio spread, the trade is designed to leverage a move to a specific level. Selling twice as many contracts lowers the cost, but it also creates the risk of losses if the stock moves too far in the intended direction. (See the discussion of put selling in our Education Section.)
RAX fell 0.18 percent to $51.14 yesterday, and is down 34 percent from its all-time highs earlier this year. Much of that drop came after quarterly revenue missed expectations on Feb. 12.
Monday's trader may own shares in the company and worry they will fall further. The ratio spread will protect them against that $2.50 of downside, while also programming a buy order at the lower end of the range. That $45 level was resistance several times in 2011 and 2012, so traders may now expect it to provide support.
Total option volume was almost twice the daily average in RAX, according to Depth Charge. Puts outnumbered calls by more than 4 to 1.