Chicago Bridge & Iron fell yesterday after announcing a big acquisition, and the bulls jumped in.
optionMONSTER's Heat Seeker monitoring system detected the purchase of 2,900 January 40 calls for $1.80 and the sale of an equal number of January 30 puts for $2.20. Volume was more than 6 times open interest at each strike.
The trade resulted in a credit of $0.40 and will earn infinite profits if the construction company rallies through early next year but also faces potential losses because of the short puts . If CBI remains between $30 and $40, the position will track the stock less closely as time passes and eventually expire worthless.
CBI dropped 14.15 percent to close at $34.94 after announcing that it would purchase Shaw Group for a premium of more than 70 percent. SHAW, however, remained below the purchase price as investors worried that the deal might not go through.
The bullish trade on CBI reflects a belief that, regardless of what happens, the stock remains attractive over the long run. Using options gives the investor exposure to a rally at no up-front costs. The company also reported strong earnings last week.
Later in yesterday's session, a block of 2,000 September 36 calls was bought for $1.73 and an equal number of September 40 calls was sold for $0.58. This bullish call spread cost $1.15 and will generate a maximum profit of 248 percent if CBI closes at or above $40 on expiration.
Overall option volume was 78 times greater than average on the day. Calls outnumbered puts by 2 to 1, according to the Heat Seeker.
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