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A Mosaic Company Synthetic Short Ahead of Earnings

Options trader initiates a very bearish strategy on this agricultural concern

by 6/29/2010 3:22:00 PM
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While the current earnings calendar is a bit thin, there are still quite a few heavy hitters scheduled to release their quarterly reports during the next month. Along those lines, The Mosaic Company (MOS) is expected to report a profit of 89 cents per share after the close of trading on July 22. The figure is a solid improvement over the company's earnings of just 33 cents per share in the same quarter last year. Historically, however, the company has been a poor fundamental performer, missing the consensus estimate in three of the prior four reporting periods.

As you would expect, options activity is starting to pick up on this agricultural concern, especially on the put front. Some 8,800 of these bearishly oriented contracts have changed hands on MOS today. In particular, options traders are focused on the September 45 strike, where more than 2,600 puts have changed hands so far.

While the September 45 strike has been the most actively traded, there was a much more interesting trade at the September 40 strike. Specifically, a block of 100 contracts traded at the ask price of $3.68 on the International Securities Exchange (ISE) at about 9:50 a.m. Eastern time. This block was marked "spread." The other half of this trade crossed on the September 40 call, where a block of 100 contracts traded at the same time on the same exchange for the bid price of $3.32. Given this data, it would appear that we are looking at a synthetic short position on Mosaic Company.



MOS September 40 call/put volume details

The Anatomy of a Mosaic Company Synthetic Short

Before we get into the particulars, a synthetic short options trade attempts to replicate as closely as possible a short stock position. The trader buys at-the-money puts and sells at-the-money calls in equal numbers at the same strike with the same expiration date. By using options, the trader gains considerable leverage, allowing for greater returns on the position than those that would be achieved by investing the same amount of money in a short stock position.

This particular synthetic short on MOS breaks down as follows: The trader bought 100 MOS September 40 puts for the ask price of $3.68. The total debit incurred for entering this position would be $36,800 -- (3.68 * 100) * 100 = $36,800. At the same time, the trader sold 100 September 40 calls for the bid price of $3.32. The total credit for entering this leg of the position arrives at $33,200 -- (3.32 * 100) * 100 = $33,200. Combining this leg of the trade with the purchased September 40 put results in a net debit of $3,600-- $36,800 - $33,200 = -$3,600 -- plus brokerage fees and margin requirements.



MOS synthetic short details

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