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• EL 0% Rate It

Estee Lauder Companies Inc. (NYSE: EL ) shares closed down 43 cents to $58.66 on the day Tuesday, which benefited one investor who opened a put one-by-two strategy in the cosmetic name.

An investor traded the April 55-60 put one-by-two spread 4,000 times during afternoon trading, buying the 60-strike puts for roughly $3.11 per contract and selling twice as many April 55 puts for around $1.10 per contract. The investor paid around 91 cents per spread (the cost of the spread dropped significantly because the investor sold double the number of 55-strike puts).

By opening a free virtual trading account with OptionsHouse, you can build a profit/loss diagram to help visualize the risk/reward dynamics of this trade.

The April 55 puts closed with open interest of 1,100 contracts, while the April 60 puts were home to open interest of just 225 contracts. This morning, current open interest of the 55-strike and 60-strike puts is …., respectively.

Investors will make a maximum profit of $4.09 per spread if EL shares expire at $55. The maximum risk to this trade occurs if the stock crashes below $50.91. At this point, the investor would be short more puts than he is long.

Though this trade looks like a lot of put volume, investors bought some of the puts and sold others, which is why we call this ratio spread a moderately bearish play instead of exceedingly bearish. The most interesting thing to remember with a put one-by-two spread is that investors are betting the stock could drop, but that the drop is likely to be limited to no more than the $50 level, and likely closer to $55.

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