Good Example of a Married Put Options Trade

07/07/2010 12:01 am EST


Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Shares of aluminum producer Alcoa Inc. (AA) are joining in a broader rally in the mining sector and the stock was up more than 3% in morning trading on Tuesday. AA has rebounded off psychological support in the $10 region. The shares have spent the prior three sessions consolidating into this level. Looking for this rally off key support to continue, one trader has entered into what appears to be a married put position on the security.

Breaking down this stock/options combined strategy, the trader purchased 3,500 AA July 10 puts for $0.32, or $32 per contract, at about 9:47 on the Philadelphia Stock Exchange (PHLX). At the same time, the trader purchased 350,000 AA shares (100 for each put contract purchased) for roughly $10 each. The total outlay on option position was $112,000, while the total cost of the stock position was $3,587,500.

In this trade, the put options act as a kind of short-term insurance for the long stock position. If AA drops below $10 per share by the time July options expire, the trader is essentially protected against any losses. Below is a profit/loss chart:

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

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