One investor wants to leverage a drop in International Paper.
optionMONSTER's Depth Charge monitoring system detected the purchase of 2,000 February 29 puts for $0.55 and the sale of 4,000 February 27 puts for an average premium of $0.245. Volume was more than twice open interest in both strikes.
The trade resulted in a cost of $0.06 and will earn a maximum profit of about 3,200 percent if the paper company's stock closes at $27 on expiration. The gains will erode below that level and turn to losses under $25.
The strategy is known as a ratio spread because twice as many contracts are sold than bought. It's a common form of hedging by investors looking to protect a long position in the shares because it provides huge leverage to a limited drop and then lets them get assigned more shares if it falls significantly. (See our Education section)
IP is down 1.58 percent to $31.24 today but up more than 20 percent in the last three months. It's been rising amid increased confidence in the economy but is significantly above its key moving averages, which could be leading some traders to expect a pullback in the near term. Earnings come out before the bell on Feb. 2.
The Depth Charge also detected the purchase of 1,000 July 31 puts for $3.10 in another bearish trade. Overall option volume in the name is slightly above average so far today, with puts outnumbering calls by 14 to 1.
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