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Trader slaps a collar on W.R. Grace

David Russell (david.russell@optionmonster.com)

One investor is hedging a bet on chemical producer W.R. Grace.

optionMONSTER's Depth Charge monitoring system detected the purchase of 1,750 January 77.50 puts for $4.50 and the sale of an equal number of January 100 calls for $1.25. There was barely any open interest at either strike before the transactions appeared, indicating that new positions were initiated.

The trader probably owns GRA stock and is using the contracts to hedge against a drop . Writing upside calls generated income, lowering the cost of owning protective puts to $3.25.

He or she has now locked in a minimum selling price of $74.25 and a maximum of $96.75 through earlier next year. The strategy is known as a collar because it constrains fluctuations in the value of the position. (See our Education section for other risk-management techniques.)

GRA fell 0.55 percent to $82.69 on Friday but is up 67 percent in the last year. It's rallying along with other chemical companies, thanks to strong demand in emerging markets.

The collar accounted for almost all the option activity in the session, according to the Depth Charge, pushing total volume to more than twice the daily average.

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