International Paper has been on a massive run, and the bulls were back on Friday as the shares eased lower.
optionMONSTER's trade scanners detected the purchase of 15,000 October 50 calls for $1.43 and the sale of an equal number of October 55 calls for $0.44. Volume was more than 80 times open interest at both strikes, indicating that a new position was initiated.
Owning calls lock in the price where investors can buy shares, while selling them obligates the trader to unload the stock if it reaches a certain level. Friday's trade set the entry at $50 and the exit at $55, so the trader will collect $5 if IP reaches the top of that range. That would represent profit of 405 percent based on its $0.99 cost, which demonstrates the kind of leverage that can be generated with options.
For example, instead of paying the full share price and making 33 percent, this call spread can make a much larger percentage gain with a much smaller investment. Losses are also limited if the stock experiences a sudden drop. (See our Education section for more on using options to manage risk.)
IP fell 0.52 percent to $45.66 in the session but is up 36 percent since mid-November. The former member of the Dow Jones Industrial Average is now approaching levels last seen in early 2000, which could be leading some traders to think that it will hit resistance at previous peaks around $60.
Friday's call spread pushed total volume close to 36,000 contracts, almost 5 times the average amount for IP. Calls outnumbered puts by a bullish 68-to-1 ratio.
(A version of this post appeared on InsideOptions Pro on Friday.)
More From optionMONSTER
- Cablevision traders view more value
- Ocwen trader sees limited downside
- Why trader is selling Petrobras calls
- Investment & Company Information
- International Paper