Deere & Company (DE: sentiment, chart, options) attracted a virtual tidal wave of put volume on Thursday. During the course of the session, traders on the International Securities Exchange (ISE) bought to open 15,530 puts on DE, compared to just 767 calls. In other words, bearish bets were 20.25 times more popular than their bullish counterparts.
Taking a longer-term look, this downbeat bias is nothing new for DE. The stock has garnered a 10-day ISE put/call ratio of 3.62, as put volume has nearly quadrupled call volume during the past couple of weeks. This ratio ranks higher than 99.2% of other such readings taken during the past year, pointing to a near-peak of pessimism among option players on the ISE.
However, many of these newly purchased puts have been accumulated at back-month strikes, which means that DE's Schaeffer's put/call open interest ratio (SOIR) isn't reflecting the recent bear raid. In fact, the SOIR has declined from its mid-April peak of 1.11 to its current reading of 0.93, in the 78th annual percentile.
While this SOIR does point to elevated levels of skepticism, near-term put open interest is nearly negligible compared to the major trading that's happening in the September series. Peak put open interest for May consists of 7,692 contracts at the 37 strike, while the most popular September-dated put is the 25 strike, with open interest of 31,333 contracts. Also active in the September series is the 35 strike, with open interest of 15,964 contracts.
In today's trading, both of these back-month put strikes continue to be the center of attention. The September 25 put has seen volume of 20,112 cross the tape, while the 35 put has traded volume of 10,057 contracts. With DE currently trading around $45, both of these heavily traded options are out of the money.
Taking a closer look at the unusual volume here, two massive trades went off on both strikes at 11:10 a.m. A block of 19,888 contracts changed hands at the September 25 strike at $0.47, just below the current bid price of $0.50. Simultaneously, a block of 9,944 contracts traded on the September 35 strike at $2.19, just one penny below the current ask price of $2.20.
This doesn't always happen when examining intraday option volume, but it seems remarkably clear what's happening here. It looks as though the 25-strike puts were sold, while the 35-strike puts were purchased. With the number of 25-strike contracts exactly doubling the number of 35-strike contracts, it seems that a trader is initiating a ratio backspread on DE.
For the sold puts, the trader would have raked in $934,736 ($0.47 * 19,888 contracts * 100 shares per contract). For the purchased puts, he or she shelled out $2,177,736 ($2.19 * 9,944 contracts * 100 shares per contract). The net debit on the position is $1,243,000. The maximum profit is limited to the difference between the two strikes, minus the net debit.
This is a bearish strategy, because the trader ideally would like DE to fall as far as the 25 strike before stopping -- if those sold calls go in the money, losses will start to develop. However, he or she definitely wants the purchased puts to go as far in the money as possible in order to maximize the return on the position.
Although both puts are well out of the money, the use of September-dated options allows plenty of time for DE to pull back as the trader expects. The stock's short-term rally recently propelled it into resistance from its 50-week moving average, which may have been the catalyst behind today's trade. Meanwhile, DE's 52-week low stands at $24.51, indicating that the 25 level may well hold as support in the event of any pullbacks.
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