Bearish Three-Way Trade on Whiting Petroleum

May. 4.10 | About: Whiting Petroleum (WLL)

By David Russell

Whiting Petroleum (NYSE:WLL) rallied to a 20-month high yesterday, and one trader positioned for a pullback using an unusual three-way trade.

WLL Chart

The investor bought 1,750 September 85 puts for $5.50, then sold the same number each of September 80 puts for $3.80 and September 70 puts for $1.70. The transaction, which had no net cost, pushed overall options volume in the stock to five times greater than average.

WLL rose 2.34 percent to $92.44 yesterday, its highest price since September 2008, and is up 34 percent in the last three months. The oil and natural-gas company reported better-than-expected earnings and revenue on April 28 and raised its full-year production forecast.

Yesterday's option strategy is designed to maximize the profit from a limited correction in the share price. It will earn a maximum profit of $5 per put contract if WLL closes between $70 and $80 on expiration. The gains will erode if it falls below $70 and turn to losses under $65.

The transaction is a bearish version of a "Christmas tree" trade, which is usually an upside play that utilizes calls. It resembles a ratio spread because more options are sold than are purchased, but it uses more than one strike on the short side.

Puts outnumbered calls by more than 4 to 1 in WLL, which reflects the bearish sentiment.

(Chart courtesy of tradeMONSTER)