United Tech draws downside action
David Russell | [email protected]
optionMONSTER's Depth charge tracking program detected the purchase of 12,000 November 75 puts for $0.78 and 12,000 November 70 puts for $0.18 yesterday. A block of 24,000 November 72.50 puts was sold at the same time for $0.35. Volume was more than triple open interest at all three strikes.
The trade cost $0.26 and will earn a maximum profit of 861 percent if the stock closes at $72.50 on expiration. Gains erode below that level and the entire position becomes worthless under $70.
Known as a butterfly, the strategy is a way to leverage a move of a specific magnitude with limited risk. It gets its name from the fact that more contracts are sold in the middle than at the two extremes, evoking the image of a body with wings.
UTX fell 0.21 percent to $77.83 yesterday. The company, which makes escalators, helicopters, and jet engines, has been fluctuating in a range for more than a year. Its earnings reports have been mediocre since January, with revenue missing analyst estimates. Management also lowered guidance in July.
Based on yesterday's activity, the trader apparently thinks that UTX is at risk of pushing modestly lower. But if he or she were more strongly bearish, the trader would have employed a strategy such as a collar or simple protective puts.
Overall option volume was more than 13 times greater than average in the session. Puts outnumbered calls by more than 10 to 1, according to the Depth Charge.