Investors are adjusting their options positions as we head into our third straight day of quiet trading. The lower volume has led to narrower bid/ask spreads, so it's a good time to realign option positions in companies that have recently seen dramatic stock price swings.
Citigroup
(C)
is one of the more active options traded today. The company's shares are coming back under pressure on concerns that there may be more writedowns.
The big transaction in C options looks to be a ratio put spread in June. Someone bought 20,000 of the $20 puts and sold 40,000 of the $12.50 puts for a net debit of $1.05 for the one-by-two spread.
This position would have a maximum profit of $6.45 if shares of C were at $12.50 on the expiration day. Its downside break-even is $6.65 per share at expiration. The real danger is if the stock takes another plunge and moves below $20 in the near term. That would cause a spike in implied volatility, and the position would suffer a paper loss, as the value of the short $12.50 puts would increase nearly as much as the $20 puts one owns. But if the stock stabilizes, the position will benefit from a decline in IV, and is a fairly low-cost way to gain significant downside protection.
Shares of Lehman Brothers
(LEH)
have performed a complete loop-the-loop in the past week, dropping 45% to a low of $20, only to double back up to $40. Today, we see July $17.50 puts and the July $40 puts trading 10,000 times.
I don't think this is a winning trade. Rather, represents someone that bought those $17.50 puts in panic and is now moving there protection up to the $40 strike. On the basis of these prices, it looks like this was a purchase in which the $17.50 calls were sold to close out a position and the $40 puts were a new purchase.
Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.To read more of Steve Smith's options ideas take a free trial to TheStreet.com Options Alerts.
