Suddenly, options traders are piling into a new name
Ashland (ASH) is usually pretty quiet in terms of options activity. The chemical maker averaged fewer than 500 contracts a day at the start of the week, but yesterday and today it’s sprung to life.
Both sessions buyers piled into the same strategy: a bullish vertical spread that will expire worthless next month unless the stock shoots to new record highs.
On Thursday, they bought 2,000 April 80 calls for $0.45 and sold a matching number of April 85 calls for $0.05. That’s small pototatos compared with today, when 7,500 contracts changed hands at each strike. This time they paid $0.70 and $0.75, while still collecting $0.05 of premium.
Here’s how it works. Owning calls fixes the price where investors can buy a stock. Selling them generates income and creates an obligation to deliver shares if the higher level is reached.
Combining the two essentially lets the trader collect the value of the “spread” between the two strikes. In this case they’ll pocket $5 if ASH closes at $85 or higher on expiration.
Here’s the kicker: Their cost was just $0.62. (They paid an average $0.67 for the April 80s and received $0.05 for the 85 calls.) That’s a potential profit of 706 percent from the stock climbing less than 20 percent. Yep, there’s a reason why people trade options. With the spread their maximum potential loss is capped at $0.62.
ASH spiked after the options hit but then eased back. It’s current up 2.56 percent to $74.08. There doesn’t appear to be any news today, although a month ago Reuters said management broke off merger talks with British firm Croda.