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Straddle Player Bets on a Big Move for Mosaic

One trader employs a long straddle on MOS

by 7/2/2012 1:46 PM
Stocks quoted in this article:

Mosaic Co (NYSE:MOS - 54.74) has been ambushed by put players today, despite sitting on a healthy year-to-date gain of approximately 9%. What's more, the equity has outperformed the broader S&P 500 Index (SPX) by almost 13% during the past month. In fact, MOS is on pace to close a third consecutive session atop its 200-day moving average, which had previously eluded the stock since last August.

Nevertheless, the chemical concern has seen an unusual amount of put activity today, as roughly 14,000 of these options have changed hands so far, nearly tripling MOS' expected intraday volume, and more than doubling the number of calls exchanged. Specifically, traders have zeroed in on the out-of-the-money July 47.50 strike, where close to 10,100 puts have been traded -- a large block of 8,750 at the ask price, signaling buyer-driven volume. However, this option is currently home to peak put open interest of 44,950 contracts, so it cannot be said with certainty whether new positions are being added here.

Meanwhile, several blocks totaling more than 900 puts were purchased at the July 55 strike, while an equal number of calls were simultaneously bought at the same strike. This activity suggests the initiation of a long straddle on MOS. In this directionally neutral strategy, the trader is expecting a swing in the stock's price, but is unsure of which direction it will go. The reward on an upside move is theoretically unlimited, while potential gains on the put play are limited to the strike price less the initial net debit. On the other hand, his potential loss is capped at the net debit paid.

From a broader sentiment scope, MOS puts have long had the upper hand over calls. The equity's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.90 is just two percentage points shy of a yearly peak, confirming that traders have rarely picked up puts over calls at a faster pace during the past year. Furthermore, the Schaeffer's put/call open interest ratio (SOIR) stands at 1.51, conveying that puts outstrip calls among the stock's front three-months' series of options. This ratio arrives in the bearishly skewed 90th annual percentile, meaning that near-term options players are showing a much healthier-than-usual appetite for puts over calls.

Despite this pessimism hovering over the options pits, MOS has still garnered quite a bit of positive attention from brokerage firms. Of the 16 analysts following the equity, 12 have deemed it worthy of a "strong buy" recommendation, while the remaining four maintain tepid "hold" ratings.


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