Various market performance charts

Options Trade of the Day: Collaring Range Resources Corp.

Various market performance charts

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Shares of oil and gas exploration firm Range Resources Corp. ( RRC ) have plunged more than 25% so far this year, but the stock's latest downleg may have spooked a few traders into finally jumping ship. Yesterday, RRC broke below short-term support at the 39 level, and while the equity has rebounded nearly 3% in today's trading, the shares are now staring up at potentially stiff resistance in the region. As such, it should come as no surprise that the equity has seen a spike in put volume this afternoon, with activity soaring to more than 11 times RRC's daily average.

RRC daily chart

Nestled among a slew of seemingly bought-to-open put contracts was a large block of 5,000 August 35 puts, which traded at the ask price of $0.73, or $73 per contract. The block was marked spread, with the other half of the trade crossing on the call side of the coin. Specifically, the trader sold 5,000 August 37.50 calls for the bid price of $1.88, or $188 per contract. The result is a credit of $1.15, or $115 per contract, for what appears to be either a collar (most likely), or an extremely bearish credit spread on RRC.

RRC August 37.50 call and 45 put volume details

For the uninitiated, a collar is an options trade established by simultaneously buying a protective put and writing a covered call on a stock already in the trader's portfolio. However, while the premium received from the sold call will help to offset the cost of the put (or even exceed it), the written call will also cap the investor's upside in the wake of an extended rally.

RRC collar details

Assuming that the strategy is indeed a collar on an existing long RRC position, the trader has set his stop-loss at $35 per share, and his target profit at $37.50 per share. Furthermore, he has given RRC until August expiration to hit either level. Depending on when the long RRC stock position was entered, the trader can limit his losses to practically nothing, or a specific percentage,or even lock in profits.

On the other hand, if the trader does not own RRC shares, the options strategy becomes an extremely bearish debit spread, with unlimited upside risk due to the sold out-of-the-money call. With the August put bought for $0.73 and the August call sold for $1.88, the trader would need RRC to remain below $38.65 in order to retain any of the premium received upon initiation.

RRC credit spread profit/loss details

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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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