by Chris McKhann | June 7, 2011 12:07 pm
Two large stocks are rallying this morning and several options trading investors are taking advantage of the moves to sell puts on the stocks.
Morgan Stanley raised its price target on Sunoco (NYSE: SUN) and the stock is trading nearly 5% higher to 41.17. The oil refiner had found support in the previous three weeks at $39 and now runs up to the highest level since May 11. Shares were at a 52-week high of $46.98 in early April.
OptionMONSTER’s systems show that 5,200 SUN January 41 Puts have traded against previous open interest of just 1 contract. Most of the contracts went off for $3.85, with blocks as large at 1,500 and 1,000, though it is entirely possible this is multiple players.
This put selling is just out-of-the-money after this big move higher. The basic bet is that SUN will remain above the $41 strike price through expiration, but some traders use at-the-money put sales as a way to get long the shares at a discount if they are assigned.
If SUN is below $41 at expiration, anyone still short these puts will be obligated to buy the shares, but will do so at an effective price of $37.15.
Find more option analysis and trading ideas at Options Trading Strategies.
Meanwhile, Temple-Inland (NYSE: TIN) is rallying after rejecting a $3.38 billion buyout offer from International Paper (NYSE: IP), and one trader is using the opportunity to sell near-term puts.
TIN has jumped more than 40% today and now trades at $29.42. The corrugated-packaging maker closed yesterday at $21.01, its lowest since December 2010. The stock hasn’t been this high since December 2007.
The option volume is already 10 times the full-session average, at 8,800 contracts. Most of this is in the TIN June 29 Puts, which are now freshly out-of-the-money and had no open interest. Virtually all of that volume appears to have been sold, with the largest block of 3,950 going for $0.15.
This put selling is a bet that TIN will hold up above $29 through expiration at the end of next week. It may also be the work of a trader who is looking to get long the stock effectively at a discount, which will be the result if they are assigned the shares.
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