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Diamond Foods Fan Undeterred by Stock's Long-Term Slump

A bullish options trader expects DMND shares to rebound during the second half of 2012

by 7/10/2012 1:31 PM
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The shares of Diamond Foods, Inc. (NASDAQ:DMND - 18.93) have been absolutely gutted over the past 52 weeks, shedding roughly 75% of their value due to an accounting scandal. However, one upbeat speculator appears to be looking for a rebound from the stock over the next six months, judging by a bullishly slanted call spread that crossed the tape earlier today.

Around 11 a.m. Eastern, a block of 3,000 January 2013 25-strike calls traded at the ask price of $1.00 each, indicating they were purchased. Simultaneously, a matching block of 3,000 January 2013 30-strike calls were exchanged at $0.35 -- closer to the bid price. Today's volume is outstripping open interest at both strikes, so this appears to be the initiation of a long call spread. In this strategy, the speculator is betting on DMND to rally up to $30 or higher by the time January-dated options expire.

This particular spread was opened for a net debit of $0.65, which is the most the trader can possibly lose. This entire amount will be forfeited if DMND closes at or below $25 upon January expiration. Meanwhile, profits will begin to accrue if the stock moves north of breakeven at $25.65 (bought call strike, plus net debit). However, the maximum potential gain on the play is capped by the sold call option. No matter how high DMND should rally prior to January expiration, the most the trader stands to make is $4.35 -- or the difference between the two strikes, less the initial net debit.

From a fundamental perspective, the picture still doesn't look too bright for DMND. The stock last week was granted a stay of execution by Nasdaq, with a potential delisting now on hold until after a July 26 hearing.

DMND is trading fractionally higher at last look, chipping away at its year-to-date deficit of 41.6%. The stock has a little bit of room to run before testing the $20 level -- a former layer of support that could potentially switch roles to act as resistance during the near term.

Daily Chart of DMND since February 2012


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