Approach Resources draws put spread


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Approach Resources is trying to lift itself from the lowest levels of the year, but traders want protection.

optionMONSTER's Depth Charge monitoring program detected the purchase of about 2,900 January 22.50 puts on the energy company, most of which priced for $3.70. An equal number of January 17.50 puts were sold at the same time for about $1.45. Volume was more than triple open interest in both strikes.

The trade resulted in a cost of about $2.25 and will more than double the investor's money if AREX closes at or below $17.50 on expiration. It's known as a put spread because premium from selling out-of-the-money contracts is used to reduce the price of options that are closer to the money. (See our Education section)

AREX rose 4.47 percent to $23.63 yesterday and is up more than 30 percent from the beginning of October. The company produces oil and natural gas from "unconventional" deposits in the United States--a corner of the energy sector that's been especially popular following two big acquisitions this week.

Yesterday's put spread could have been the work of a speculative bear or of an investor who wants to hedge a long position in the name. Given the speed of AREX's recent bounce, he or she may fear a pullback before it continues higher.

The use of January contracts gives the position plenty of time for such a move. Thanks to the spread, the trader is protected for several months and can still enjoy a rally.

Overall option volume was more than 15 times greater than average in AREX, with puts outnumbering calls by 5 to 1.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing , Options

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