By David Russell
Option volume surged in International Paper (IP) yesterday as a large trader tailored a strategy to match a very specific prediction for the stock.
The trader purchased 6,000 March 24 calls for $1.60 and sold 12,000 February 25 calls for $0.69. Given the credit received, the March 24 calls were acquired at a net cost of just $0.22 per contract.
The strategy, a combination of a calendar spread and a ratio spread, will perform best if IP remains below $25 through Feb. 19 and then climbs above that level. Executing the trade now let the investor garner the most premium from selling the upside calls. (See optionMONSTER's Education section)
IP rose 0.50 percent to $24.02 yesterday and is down 10 percent in the last month. The paper company, whose profit beat forecasts the last time it issued results on Oct. 28, is scheduled to report earnings before the bell today.
Yesterday's option trade may have been implemented by shareholder who owns the stock and is willing to sell it for $25 if the shares trade above that level before February expiration. Otherwise, their profits will erode and turn to losses above $26.
An examination of the chart indicates the upside risk could be small because there is potentially strong resistance around the $26 area.
Overall options volume in the stock was four times greater than average yesterday, with calls accounting for 83 percent of the activity.
(Chart courtesy of tradeMONSTER)