Caution reigns in trade on L Brands

optionMONSTER

Traders are cautious before L Brands reports monthly sales tomorrow.

optionMONSTER's Depth Charge monitoring system detected the purchase of 2,000 September 55 puts for $1.55 and the sale of 4,000 September 52.50 puts for $0.75. Volume was more than triple open interest at each strike, indicating that new positions were initiated.

Owning puts lock in the price where shares can be sold in the retail company, whose brands include Victoria's Secret and Bath & Body Works. These options will appreciate in value if the stock drops, but selling puts will force traders to buy shares if they fall to a certain level.

Today's transaction is known as a ratio spread because twice as many contracts were sold as the number bought. It cost just $0.05 and will expand to $2.50 if LTD closes at $52.50 on expiration. Below that level they will have to buy shares for $52.50.

The trader probably owns the stock already and is using the strategy as a hedge. This way, he or she will be compensated on the drop while keeping a buy order in place at the lower price. (See our Education section for other risk-management techniques.)

LTD is down 0.63 percent to $56.60 in midday trading but is up 14 percent in the last month. It touched an all-time high of $58.69 on Aug. 2, despite monthly same-store sales missing estimates in early July.

Total option volume is quadruple the daily average so far today, with puts outnumbering calls by more than 19 to 1.

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