Avon draws cautious upside strategy

optionMONSTER

As Avon Products clings to a multi-year low, one bull is placing a cautious bet.

optionMONSTER's Heat Seeker monitoring system detected the purchase of 1,200 October 18 calls for $0.46. Equal-sized blocks were sold in the October 14 puts for $0.75 and bought in the October 12 puts for $0.29, resulting in a net cost of about zero.

The strategy earns income with a put credit spread and uses that money to buy calls. It will earn infinite profits if the cosmetics company rallies, and face a maximum loss of $2 if it drops to $12. The stock hasn't traded below $14 since 2000, so they may consider that risk small.

AVP is off 0.42 percent to $15.47 in afternoon trading. The company has lost more than 40 percent of its value in the last year amid chaos in the boardroom and as it struggles to defend market share.

Today's bullish trade is specially tailed for a company such as AVP, which could rebound after such a big selloff. But, if the situation worsens, it could have much more downside. (See our Education section for more ways that calls and puts can be combined to create positions that are safer than owning stock.)

The bullish trade accounted for almost all the options activity in the name so far today.

More From optionMONSTER

View Comments (0)