Markets

Ratio spread seeks Denbury hedge

Denbury Resources is trying to rebound, and one investor wants a hedge.

optionMONSTER's Depth Charge monitoring program detected the purchase of 4,000 December 14 puts for $1.30 and the sale of 6,000 December 11 puts for $0.40. Volume was more than 20 times open interest in both strikes.

Known as a ratio spread , the trade will protect against a limited drop in the oil and natural-gas company. It uses different numbers of contracts at the two different strikes to increase leverage. Yesterday's transaction was slightly unusual, with a 2-to-3 ratio between the puts bought and sold.

That resulted in a cost of $0.70 per contract bought, and a maximum profit of 329 percent if DNR closes at $11 on expiration. The gains will erode below that level and turn to losses under $5.

DNR rose 2.95 percent to $14.64 yesterday. The stock has lost 35 percent of its value in the last six months but now appears to be finding support around the same level where it bottomed in July and August of 2010.

Overall option volume was 11 times greater than average in the session, with puts outnumbering calls by 28 to 1.

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.


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

In This Story

DNR

Other Topics

Options

Latest Markets Videos