VALE – Vale – Two-opposite minded options strategists initiated spreads on the iron-ore producer today. One of the investors displayed bearish sentiment on the stock by purchasing a plain-vanilla debit put spread, while the other options player put forth an optimistic stance on Vale by enacting a bullish risk reversal. Vale’s shares are up 0.70% to stand at $27.40 as of 3:40 pm (ET). The Vale-bear initiated a debit put spread, buying 7,500 lots at the September $25 strike for a premium of $1.36 apiece, and selling the same number of puts at the lower September $20 strike for $0.40 in premium per contract. The net cost of the transaction amounts to $0.96 per contract and prepares the investor to profit if Vale’s shares fall 12.25% from the current price to breach the effective breakeven point on the spread at $24.04. The put-spreader pockets maximum potential profits of $4.04 per contract if the iron ore producer’s shares plunge 27% to trade below $20.00 by expiration day in September. In contrast to the bearish trade in the September contract, an investor touting a rosier outlook enacted a bullish risk reversal by selling 11,000 puts at the August $25 strike for $1.00 each, and by purchasing the same number of calls at the higher August $29 strike for $0.95 apiece. The risk reversal strategy in this case yields a net credit of $0.05 per contract to the responsible party, who keeps the full credit received as long as Vale’s shares exceed $25.00 through August expiration day. Additional profits are available to the risk reversal player if VALE’s shares rally more than 5.8% to surpass $29.00 by expiration.
Affiliation: Interactive Brokers
Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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