Put Volume Spikes While Commodity Stocks Falter

Commodity related stocks took a hit Monday. For example, the SPDR S&P Metals & Mining Fund (XME), which holds 24 companies including Alcoa (AA), Freeport McMoran (FCX), and Peabody Energy (BTU), tumbled $5.54 to $70.71 a share. The move was sparked by a morning reversal in crude oil along with talk of big hedge funds selling off commodities in general. In addition to shares of oil-related companies, mining, natural gas, coal, and agricultural stocks all finished the day sharply lower.

The move sparked a flurry of put activity in the XME. At the end of the day, 36,000 puts and only 1,015 call options had traded on the session. The top two trades included an order of 18.583 August 67 puts trading offerside for $1.05 a contract and an order of 7,634 September 62 puts for $1.82. It appears that some investors were scrambling to buy some short-term protection from the risk of another round of selling in shares of metals and mining companies.

Terra Industries (TRA) was one of the individual commodity-related names seeing bearish trading. Shares fell along with other agricultural stocks, closing the session down $7.97 to $45.94 a share. The move seemed to be part of the commodity sell-off (metals, mining, oil, coal) and came ahead of weekly USDA crop reports due out Monday afternoon.

In the options market, TRA volume rose to 6 times the usual. 29,000 puts and 8,400 call options traded on the day. The top two trades included an order for 10,000 December 40 puts traded for $3.70 a contract and another 10,000 December 30s for $1.10; both orders trading on the PHLX at approximately 12:45 when TRA was trading at $49.45.

Sources on the exchange tell WhatsTrading.com that the action is part of a substantial bear put spread, where the strategist bought the 40s and sold the 30s for a net debit of $2.60. If so, it is a big bet that TRA will continue to slide and has a maximum payoff potential of $7.40 if the stock falls to $30 or less by December options expiration. So far so good because, by the end of the trading session Monday, the spread had already widened to $3.10.

Stock position: None.

Comments

[Urbane Gori...:]

Re: "talk of big hedge funds selling off commodities in general" ... I've heard this 4 times in two days now, but no-one seems to know who it is... jegan ;-)

2008 Aug 05 01:43 PM

[Bhakta:]

Total indicator of market manipulation.

2008 Aug 05 07:14 PM

[FWallace:]

just curious, would you include Alternative Energy stocks such as Solar, Wind, Hydro etc... part of the current commodities sell-off ?

thanks

2008 Aug 05 07:34 PM

[racerz:]

Agreed - this is market maipulation at its finest (or should I say worst). Us poor "peeon" investors must stay long and throw them off.
We'll be repaid when things like earnings per share, PE's, guidance and common sense reurn to the commodities. I will not sell, and added positions in FCX, ABX and BTU today when they went south later in th session.

2008 Aug 05 09:25 PM

[bones33:]

The little man always gets left holding the bag.These funds get together at there cocktail parties and all decide to sell at the same time and sell in to any strength because they have enough shares to stall any rallies, knowing they'll be able to buy back at a much lower price.

2008 Aug 06 12:01 AM

[Ermilo:]

I have to disagree with you all fine people. I'm a small option trader with only about 10K in my account, and I'm going to sell naked calls or buy puts on this company as well. Remember, we all have choices in life, its up to you to decide how you want to play the game.

Happy investing to everyone.

2008 Sep 12 04:47 PM