Nerves on edge in SandRidge Energy

optionMONSTER

SandRidge Energy has been lagging its sector, and the action remains bearish.

optionMONSTER's Depth Charge tracking program detected the purchase of 12,500 June 6 puts for $1.03 and the sale of 25,000 June 5 puts for $0.51. Volume exceeded the previous open interest at each strikes, indicating that these are new positions.

The trade cost just $0.01 and will earn a maximum profit of 9,900 percent if SD closes at $5 on expiration. Gains will erode below that level and turn to losses under $5. It's known as a ratio spread because twice as many contracts are sold at the lower strike as the number bought at the higher strike.

The trade has an extremely low cost basis and thus greater leverage, but too big of a move can force the investor to buy more shares at a loss. (See our Education section for more on selling puts .)

SD is up 0.64 percent to $5.98 in morning trading. It's down 10 percent in the last six months, while the broader energy sector has appreciated by 9 percent in the same period.

Today's investor may be using the ratio spread to protect a long position in the Oklahoma City-based gas and oil company, in which case he or she would be willing to buy more shares for $5.

Total option volume is twice the daily average in SD so far today, with puts outnumbering calls by a bearish 24-to-1 ratio.

More From optionMONSTER

View Comments