Ratio Put Spread Trader Speculates on SunTrust Banks (STI)

03/11/2010 12:01 am EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

SunTrust Banks, Inc. (STI) was singled out for a ratio put spread in yesterday's trading, with one speculator placing a very confident bet on the stock's near-term trajectory.

Shortly after the open, a block of 15,000 puts traded on STI's April 22 strike for the bid price of $0.18, indicating they were most likely sold. Simultaneously, a block of 7,500 April 24 puts changed hands at the ask price of $0.42, suggesting they were probably purchased. In other words, the trader sold two puts for every one purchased put. With STI trading near $27 today, both of these put strikes are out of the money by a notable margin.

In opening this spread, the trader is betting that STI will fall below the $24 level prior to April expiration. However, this speculator isn't anticipating an out-and-out plunge, as evidenced by the sale of the April 22 puts. In fact, if STI falls below $22 prior to April expiration, the trader could potentially swallow some steep losses, since only half of his short puts are hedged by long puts. In other words, it's safe to say this option player is very confident in his outlook for STI.

The best-case scenario would be for STI to settle squarely at $22 upon April expiration, which would return the maximum potential profit on the purchased puts, while allowing the sold puts to expire worthless.

Click to Enlarge

On the charts, STI tagged a new 52-week peak of $27.25 earlier today. The shares are up roughly 4% as we head toward midday, outpacing solid support from their ten- and 20-week moving averages. The regional banking issue is catching a lift from buyout speculation, with a few news outlets citing STI as a potential takeover target for Barclays (BCS).

By Elizabeth Harrow of Schaeffer’s Trading Floor Blog

  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on OPTIONS