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Plains Exploration & Production Company (PXP - 37.04) has been popular in the options pits today, after the stock was downgraded from "buy" to "neutral" at Goldman Sachs. In early afternoon trading, PXP has seen roughly 4,500 calls and 3,500 puts change hands -- already surpassing its average daily volume of about 2,100 calls and 1,500 puts.
Jumping right in... Traders have shown an affinity for the equity's at-the-money February 37 call, which has seen more than 3,000 contracts traded on open interest of fewer than 900, pointing to newly opened positions. However, the bulk of the options have traded between the bid and ask prices, making it difficult to tell whether they're being bought or sold.
Meanwhile, the stock's out-of-the-money March 31 and 35 puts have each seen more than 1,500 contracts cross the tape on open interest of 10 contracts and zero contracts, respectively. In fact, it looks like most of the put activity is related in the form of a bear put spread. Specifically, the trader bought several hundred March 35 puts for the ask price of $1.58, and simultaneously sold an equal amount of March 31 puts for 58 cents each, resulting in a net debit of $1 per pair of puts.
By initiating the strategy, the investor will make money if PXP retreats beneath the $34 level (bought put strike minus net debit) within the options' lifetime. However, while the sale of the lower-strike puts reduced his cost of entry -- which represents the maximum risk on the play -- it also caps his maximum profit potential at $3 (difference between strikes minus net debit), no matter how far PXP should sink beneath the $31 level. Had he simply bought the 35-strike puts, his profits would increase with each step south of breakeven.
At last look, PXP has surrendered 3.1% to linger in the $37.04 vicinity.