Strategy positions for drop in Werner-10/23/2009

Trucking firm Werner Enterprises gapped higher this week, and now one investor is positioning for a modest pullback.

optionMONSTER's Depth Charge tracking system detected the purchase of 6,000 June 10 puts for $2.25 yesterday, plus the sale of 12,000 June 17.50 puts for $1.10. Volume was more than 20 times open interest in both strikes.

WERN was unchanged at $20.31. On Tuesday it closed above $20 for the first time in more than a year after third-quarter sales and earnings beat estimates. About 15 percent of the traded shares were sold short as of Sept. 25, so forced buying may have contributed to the pop higher.

The so-called ratio trade is designed to leverage a small decline in the stock. Because the investor sold twice as many options as those purchased, the cost was reduced to just $0.05 per put contract owned.

The strategy will produce a maximum profit of 4,900 percent if WERN closes at $17.50 on expiration. Profits will erode below that level and turn to losses under $15.

The trade may have been implemented by an investor who purchased the stock in recent days and is looking to hedge against a decline. This trader could be willing to buy more shares if the price falls to $17.50 and therefore isn't worried about the downside risk.

Overall options volume in WERN was more than 60 times greater average yesterday, and puts exceeded calls by 277 to 1.

(Chart courtesy of tradeMONSTER)

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