Stocks quoted in this article:
Option Brief: Deere & Company (NYSE:DE) is up 2.5% this afternoon to trade at $84.75, after the firm said it expanded its share buyback program by $8 billion. Meanwhile, the stock's options pits are brimming with activity, as overall volume is running at more than six times the expected intraday pace. Most popular has been the December 87.50 call, which has seen north of 12,800 contracts change hands. Since a large portion of the calls crossed at the ask price -- and implied volatility has ticked higher -- it's possible that new long positions have been created here.
Meanwhile, a block of 9,500 calls traded at the January 2015 87.50 strike, while an equal number of puts was exchanged simultaneously at the January 2015 82.50 strike. According to Trade-Alert, both blocks were sold to open -- the calls for $6.05 each, and the puts for $6.95 apiece. In other words, it appears that one speculator constructed a short strangle on DE for a net credit of $13 per pair of contracts.
In this strategy, the trader is counting on the security to finish between the strike prices at January 2015 options expiration. This would render the contracts worthless, and allow him to pocket the net credit received, which also represents the maximum reward on the play. The lower breakeven rail is $69.50 -- or the put strike less the net credit -- while the upper breakeven rail is $100.50, or the call strike plus the net credit. If the stock backpedals, the speculator's losses are capped at $69.50 should Deere & Company (NYSE:DE) fall all the way to zero, while his risk is theoretically unlimited if DE moves higher.