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Spread targets historical move in IP

David Russell (david.russell@optionmonster.com)

A large trader apparently believes that International Paper is headed back to long-term highs.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 25,000 January 50 calls for $2.34 and the sale of 50,000 January 60 calls for $0.47. Volume exceeded open interest at each strikes, indicating that new positions were implemented.

The trade cost $1.40 and will earn a maximum profit of 614 percent if the packaging company closes at or above $60 on expiration. Gains will erode above that level and turn to losses over $70.

The strategy is known as a ratio spread because twice as many contracts were sold as the number bought. That lowers the cost basis of the trade and increases its potential leverage, but it also creates the risk of being naked short calls at the higher strike. (See our Education section)

The investor might not consider that a major risk because the paper and packaging company peaked around $60 in the late 1990s. Using the ratio spread lets him or her get additional leverage on move to that level. The stock has been consolidating above its 2002-2004 highs for most of the year.

IP is up 0.88 percent to $45.42 in afternoon trading. The bullish ratio spread is the largest option trade on any stock so far today.

More than 82,000 contracts have changed hands in the name, according to the Heat Seeker. Calls outnumber puts by 48 to 1, a reflection of the session's bullish sentiment.

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