This post is for education purposes only and should not be interpreted as a trade recommendation.
A major farming stock has pulled back, and options traders want to harvest a rally.
Huge derivatives volume was detected yesterday in tractor maker Deere (DE), with a block of 13,192 June 155 calls purchased for $8.55 and a matching number of June 160s sold for $6.25.
Owning calls fix the price where investors can buy a stock. That allows them to leverage a potential rally, but also creates the risk of losing their entire investment from even a small drop in the underlying shares. See our Knowledge Center for more.
There are two possible explanations for the activity. On one hand, both legs may have been opened in a new bullish spread. That strategy uses money from selling one contract to lower the overall price, looking to control a move between two levels. In this case, they’d more than double their money from DE rising less than 6 percent to $160:
- Buy for $155, sell for $160 = $5 return.
- Divide that $5 by $2.30 cost and potential profit = 117 percent.
- Below $155 on the third Friday of June, and their position expires worthless.
Alternately, the investor might have previously owned the 160 calls and rolled their position down to the lower strike after DE’s recent slide. Either way, they’re looking for the shares to move higher.
Maybe they like how the chart’s holding around $150. That matches a level it reached following a strong quarterly report in November. The stock also bounced there last month.
Management raised guidance on February 16 as machinery-replacement and construction demand improved. DE failed to hold its initial rally that session, but Wednesday’s options traders may be looking for more good news with the next set of numbers scheduled for May 18.
DE closed down 0.45 percent to $151.48. Overall option volume was more than twice the monthly average, with calls outnumbering puts by a bullish 5-to-1 ratio.
This post is for education purposes only and should not be interpreted as a trade recommendation. Options trading may not be suitable for all investors.