RL – Polo Ralph Lauren Corp. – The maker and designer of clothing, accessories, fragrances and home furnishings popped up on our ‘hot by options volume’ market scanner just before 12:00 pm ET after one cautious investor donned bearish put options in the November contract. Ralph Lauren’s shares edged 1.5% lower in early afternoon trading to stand at $88.47 as of 12:40 pm ET. The investor initiated a ratio put spread, perhaps to hedge results of the firm’s second-quarter earnings report, which is scheduled for release ahead of the opening bell on November 3, 2010. The put player purchased 2,000 in-the-money puts at the November $90 strike at a premium of $5.75 apiece, and sold 4,000 puts at the lower November $85 strike at a premium of $3.45 each. The options strategist receives a net credit of $1.15 per contract on the transaction. Maximum potential profits, including the net credit, of $6.15 per contract are available to the ratio-spreader should Polo’s shares fall another 3.9% from the current price of $88.47 to settle at $85.00 at expiration. The net credit received on the trade extends the buffer zone shielding the trader from losses in the event that shares decline more than expected by November expiration. Without the net credit, the profile of the trade dictates a lower breakeven price of $80.00. But, the net credit pushes the effective breakeven price at which losses start to amass down to $78.85. The clothing designer’s shares would need to plunge 10.9% lower in order for the trader to start losing money beneath the effective breakeven point at $78.85 by November 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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