Shares of Origin Agritech Limited (SEED: sentiment, chart, options) have been on fire ever since the Chinese government approved the marketing of the company's genetically modified phytase corn. On Monday, the stock was targeted by a veritable explosion of call volume, with traders trying to ride the wave higher. While calls are just as popular today, with volume soaring to more than eight times the norm, put volume is starting to gain traction as traders begin trying to call a top to the recent surge in the shares. In fact, some 19,000 puts have traded so far, more than seven times SEED's daily average put volume.
On the call side, SEED's December 10 strike has seen more than 5,300 contracts cross the tape on open interest of 26,323 contracts. Meanwhile, the most popular put also resides at the December 10 strike, which has traded more than 5,400 contracts on open interest of 12,878 contracts.
Digging into this volume, I noticed that a block of 1,200 December 10 calls traded on the International Securities Exchange (ISE) at 10:50 a.m. Eastern time for the ask price of $1.50. Furthermore, this block was marked "straddle." As you would expect with a straddle position, I found the other half of this trade at SEED's December 10 put, where 1,200 contracts changed hands at the same time on the same exchange for the ask price of $1.30. By implementing this strategy, the trader needs SEED to move sharply by the time these options expire at the close of trading on Friday, Dec. 18; direction doesn't matter.
For those not familiar with this options strategy, a straddle is the simultaneous purchase or sale of an equal number of puts and calls on a given underlying stock with the same expiration and strike price. The straddle purchaser is looking for a large move by the stock, one that exceeds the focus strike by more than the amount of the premium paid for both options.
The Anatomy of an Origin Agritech Limited Straddle
Drilling down on today's SEED straddle, the trader purchased 1,200 December 10 calls for $180,000 -- ($1.50 * 100) * 1,200 = $180,000. At the same time, the trader also purchased 1,200 December 10 puts for $156,000 -- ($1.30 * 100) * 1,200 = $156,000. The total outlay for this position would be $336,000 -- $180,000 + $156,000 = $336,000.
There are two ways of determining the maximum profit on a straddle position. If SEED jumps higher, then the maximum profit is theoretically unlimited, as there is no cap to how high the shares can rally. If SEED plunges, the maximum profit is limited to the purchased strike minus the total debit paid. For this position, the maximum profit from a downside move is $7.20 -- 10 – 2.80 = 7.20 -- or $720 per contract.
There are also two breakeven points for this position. They are calculated by adding and subtracting the net debit to/from the focus strike. For the example, the breakevens are $12.80 -- 10 + 2.80 = $12.80 -- on the upside, and $7.20 -- 10 – 2.80 = $7.20 -- on the downside. Finally, the maximum loss is limited to the net debit paid upon entering the position. Below is a chart for a rough visual representation:
Implied Volatility
Traders should not be afraid of rising implied volatility following the initiation of a straddle position. An increase in implieds increases the value of the purchased options, allowing the trader to collect a higher return by selling (to close) the position. At the time of the trade, implieds for the SEED December 10 call were 102.40%, while the implied volatility for the December 10 put rested at 155.10%. For comparison, the stock's one-month historical volatility arrives at 245.88%.
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