Big hedge dominates Stillwater trade

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Stillwater Mining fell earlier in the month, and the bears are preparing for more potential pain on the horizon.

optionMONSTER's Depth Charge monitoring system detected the purchase of 5,000 December 10 puts for $0.84 and the sale of 10,000 December 9 puts for $0.40. There was barely any open interest at either strike before the transaction appeared, indicating that these are new positions.

The trade cost $0.04 and will earn profit of 2,400 percent if the platinum stock closes at $9 on expiration. Gains erode below that level and turn to losses under $8. It's known as a ratio spread because twice as many contracts were sold as the number bought.

Shareholders often use the strategy to hedge long positions against a limited drop. They like this trade because it can generate significant leverage if shares decline, while also programming a buy order at the lower strike because of the larger position in the short puts . (See our Education section)

SWC rose 0.39 percent to $10.19 yesterday but is down 14 percent so far this month. Most of that drop occurred on Oct. 11, when management announced that it would dilute shareholders by issuing $300 million of convertible bonds. The stock has been consolidating below its 200-day moving average since, which could be leading some chart watchers to expect further downside.

Overall option volume was 5 times greater than average in the session, according to the Depth Charge. Puts outnumbered calls by a bearish 13-to-1 ratio.




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

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


This article appears in: Investing , Options

Referenced Stocks: SWC

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