Back to Main

Alliance Data Systems (NYSE: ADS) put one-by-three

By: Karla Yeh
Posted: 3/1/2010 7:35:00 PM
Referenced Stocks: ADS

In an interesting LEAP options trade, an investor bought a put one-by-three ratio spread in Alliance Data Systems Corp. (NYSE: ADS ) during midday trading.

Around 12:40 p.m. EST, an investor bought 3,000 January 2012 50 puts for $6.90 per contract and financed that purchase by selling three times as many January 2012 30 puts for $1.60 per contract . This investor paid $2.10 per ratio spread, establishing a moderately bearish position on the credit services name.

What makes this trade most interesting is that these options will take nearly 2 years to expire.  It is therefore likely that the investor is betting that the spread will appreciate, long before expiration.  That appreciation could come from a change in implied volatilities.  This spread is net short vega, so the investor will make money should implied volatility decline.  Implied volatility of the 30-strike puts is 41%, and the 50-strike puts have an implied volatility of 35%. This compares to a 30-day historical volatility of 46%.    

If net implied volatility in ADS Jan 2012 options declines or the spread between the strikes narrows, the investor stands to profit.  To model the Greeks for trades such as this, open a virtual trading account .