Staying hedged in Louisiana-Pacific

By David Russell,

Shutterstock photo

Louisiana-Pacific is back to long-term resistance, and one investor thinks it may drop.

optionMONSTER's Depth Charge monitoring system detected the purchase of 2,100 January 10 puts for $0.87 and the sale of an equal number of January 12.50 calls for about $1.04. Volume was more than triple the open interest at each strike, indicating that this was new activity.

The trader collected a credit of $0.17 and stands to make money from the lumber stock pushing lower through early next year. He or she probably owns shares and is using the strategy as a hedge. In that case it would be a collar, a common strategy for managing risk.

LPX slipped 0.51 percent to $11.75 yesterday but is up more than 40 percent so far this year. The stock has been riding a wave of optimism about the housing market but is now sitting around the same level where it peaked early last year. That could be leading some chart watchers to believe that it will struggle to rise further.

The advantage of yesterday's trade is that the investor uses money from selling the upside calls to buy the downside puts. The trader probably thinks that a push all the way to $12.50 is unlikely. Even if LPX went so high, he or she would probably be happy to exit at that level.

Using long-dated contracts also delays the actual sale price until January, which could have tax benefits. (See our Education section for more about how options can be used to manage positions.)

Nearly 5,200 contracts traded in the name yesterday, almost 5 times its daily average.

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: LPX

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