Markets

Bearish strategy piles on RadioShack

RadioShack has been trending lower since the turn of the century, and one bear is looking for the downside to continue.

optionMONSTER's Depth Charge tracking program detected the purchase of 1,500 January 3 puts for $1.04 and the sale of 3,000 January 1.50 puts for $0.20. Volume was more than twice the previous open interest at both strikes.

The trade resulted in a cost of $0.64 and will earn a maximum profit of 134 percent if the electronics chain closes at $1.50 on expiration. Gains will erode below that level and disappear if RSH goes to zero.

The strategy is known as a ratio spread because twice as many puts were sold as were bought, which increases leverage by reducing the cost. Ratio spreads can also face losses if shares move too much in the intended direction, but that won't be the case with Friday's trade because they can't go below zero. (See our Education section)

RSH rose 4.44 percent to $2.59 in the session. The stock has lost more than 80 percent of its value in the last year, with much of that decline resulting from a gap lower on Wednesday after a disastrous quarterly report.

The stock fetched almost $80 during the tech bubble but has found itself on the wrong side of the business since then as margins have evaporated at brick-and-mortar electronics retailers, including Best Buy. It also failed to capitalize on the rise of Apple's iPod more than a decade ago.

Overall option volume in RSH was triple the daily average on Friday, 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.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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