Good Example of Bearish Put Spread

06/24/2010 12:01 am EST


Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Fifth Third Bancorp (FITB) had already attracted some unusual options activity on Wednesday, barely an hour into the trading session. At about 9:45 am ET, a block of 6,500 FITB July 12 puts traded on the Philadelphia Stock Exchange (PHLX) for $0.13, or $13 per contract. At the same time, a block of 6,500 July 13 puts traded for $0.34, or $34 per contract. Taking a closer look, it is clear that we are looking at the initiation of a new position, as open interest at the July 12 put totals only 1,034 contracts, while some 5,831 contracts are open at the July 13 put.

Both blocks traded between the bid and the ask prices, making it hard to determine if these contracts were bought or sold. However, we can get an idea of what the trader intended by examining the change in implied volatility at the time of the trade. In this case, “implieds” slipped 0.27% on the July 12 put and rose 0.55% on the July 13 put. Taking this data into account, we could speculate that the 13 puts were bought to open, while the 12 puts were sold to open, hinting that we are looking at a bearish debit spread on FITB.

Assuming this is the case, the trader paid $0.21, or $21 per contract, to enter this debit spread. Furthermore, the position reaches its maximum profit of $0.79, or $79 per contract, if FITB falls to $12 per share by the time these options expire on July 16. Below is a profit/loss chart for more clarification:

By Joseph Hargett, contributor, Schaeffer’s Trading Floor Blog


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