How Options Traders Scored A Profit On This Dow Stock

Analysts were skeptical of 3M stock

Patrick Martin
Oct 19, 2017 at 1:33 PM
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Subscribers to Schaeffer's Weekly Options Trader service recently scored a 132% profit from weekly 10/13 205-strike 3M Co (NYSE:MMM) calls. Below, we'll break down why we were bullish on MMM and how the successful options trade unfolded. 

When we recommended the weekly calls on Sept. 29, 3M stock had just moved off an overbought condition. Plus, the Dow stock was up around 17% year-to-date, and had pulled back to support at its 20-day moving average -- which was in the vicinity of a trendline connecting lower highs since the June peak.

Despite 3M's solid performance this year, analysts weren't as optimistic. Of the 13 brokerages that were covering 3M, nine rated it a "hold" or "strong sell." A round of well-deserved upgrades could spark tailwinds for the shares.

In the options pits, 3M's Schaeffer's put/call open interest ratio (SOIR) was docked above 2.50 -- in the 93rd percentile of its annual range. This meant short-term options traders were fading the stock's price action, and had rarely been as put-heavy toward the equity as they were at that point. An unwinding of these bearish bets in the options pits could drive the stock even higher.

Furthermore, 3M stock had low volatility expectations priced into its near-term options. This was according to its the Schaeffer's Volatility Index (SVI), which stood at 12%, in the 12th percentile of its annual range. Plus, the weekly 10/13 implieds were docked at 12 -- a level that was lower relative to that of the 52-week range.

The stock subsequently pushed higher, allowing us to close half of our position on Oct. 4. When 3M then shot to a record high on Friday, Oct. 13, we recommended options traders close the remaining half of their position ahead of that evening's expiration, locking in a gain of 132% in a matter of weeks. 

Trade Postmortem 3M


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