Nerves on edge as Domtar hits key level

By David Russell,

Shutterstock photo

Domtar is back to a key level from 2011, and one trader is positioning for a selloff.

optionMONSTER's Depth Charge tracking system detected a large complex strategy in the Canadian paper company, with blocks 1,500 contracts each trading in the July 90 puts, the July 80 puts and the July 105 calls. The 80s and 105s were sold for $2.55 and $2.50, respectively, while the 90s were bought for $6.05.

Our systems also detected similar-sized blocks in the April 75 puts, the April 85 puts and the April 105 calls. The trades were the mirror images of each other, and volume was below open interest in April. That indicates an existing position was rolled forward by three months.

The strategy is bearish and combines elements of a collar trade and a vertical put spread . It essentially leaves the trader short stock if UFS pushes above $105, so was probably the work of an investor who owns shares and wouldn't mind being forced to sell if they climb that high. (See our Education section)

UFS fell 1.1 percent to $92.97 yesterday but is up 26 percent in the last three months. It's now back to the same price area where it consolidated in June and July 2011, which could lead some chart watchers to expect resistance around this level.

It also peaked around $105 a few months earlier, so it makes sense that traders would be selling calls at the 105 strike as well.

UFS normally trades just 165 contracts in a session, but yesterday's bearish trades pushed its volume to more than 58 times that amount, according to the Depth Charge.

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
Referenced Stocks: UFS

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