FDO – Family Dollar Stores, Inc. – Shares of the operator of general merchandise retail discount stores rallied 1.4% this afternoon to touch an intraday- and new 52-week high of $43.50. Put activity on the stock, which is likely the work of an investor locking in recent gains in Family Dollar’s shares, pushed the FDO ticker symbol onto our ‘hot by options volume’ market scanner today. Alternatively, the spread could have been enacted by an investor expecting FDO’s shares to cool ahead of October expiration. Regardless of the motivation for the transaction, the put player picked up 5,000 puts at the October $43 strike for premium of $2.20 each, and sold 10,000 puts at the lower October $40 strike for an average premium of $1.075 apiece. The average net cost of putting on the trade amounts to just $0.05 per contract. The transaction could be a cheap way for an investor who is long shares of the underlying to lock in profits enjoyed during the present rally. Or, if the transaction is the work of a trader initiating an outright bearish bet that shares are set to decline by expiration, they will start to amass profits if shares slip beneath the effective breakeven price of $42.95, and may walk away with maximum potential gains of $2.95 per contract should shares settle at $40.00 at expiration. The larger proportion of short puts in the spread suggests the investor is not expecting FDO’s shares to collapse in the next several months.
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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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