Palo Alto Networks has pulled back to levels from its initial
public offering, and the bulls are stepping in.
optionMONSTER's Heat Seeker monitoring system detected the purchase
of 1,500 March 60 calls for $2.15 and the sale of 3,000 March 70
calls for $0.45. Volume was more than 5 times open interest at each
The position cost $1.25 and will earn a maximum profit of 700
percent if the maker of network-security systems closes at $70 on
expiration. Gains will erode above those levels and turn to losses
The trade is known as a
because twice as many calls were sold as the number purchased. That
increases the leverage by lowering the cost basis but also creates
the risk of losing money above a certain level.
In the case of Friday's trade, this decision appears to make sense
based on PANW's price chart because it peaked around $70 in
September. The price action could have made the investor doubt that
big gains will occur above that level.
The trader may have also bought the stock for about $70 and is now
sitting on a losing position. Using the ratio spread would let him
or her leverage a rebound back to that level, and above it the
will be offset by the shares already owned. (See our
for other ideas on how to repair trades using options.)
PANW rose 3.6 percent to $53.25. It went public for $42 a share in
July but immediately shot above $50. It rallied for the next two
months before pulling back to that same level from its IPO.
Total option volume was 11 times greater than average in the
session, with calls outnumbering puts by 8 to 1.
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