Will Ashworth
6 min read
In This Article:
Stifel Financial analysts downgraded Zoetis (ZTS) stock from a Buy to a Hold rating on Wednesday, citing slower growth over the next two years due to increased competition.
The animal health company’s shares fell by 4% on the news. Down nearly 8% over the past year, considerably worse than the 9.3% gain for the S&P 500 and 4.8% for Idexx Laboratories (IDXX), its biggest competitor.
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Geopolitical Volatility Puts Iamgold (IAG) on the Radar for Risk-Tolerant Bulls
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Unusually Active Put Options Signal Long Straddle Opportunity After Zoetis Downgrade
As a result of the downgrade, its share volume yesterday was 4.66 million, x times its 30-day average. At the same time, the options volume was also unusually high, at 5,028, almost five times the average.
There were 2,014 unusually active options yesterday--1,001 calls and 1,013 puts. Of the puts, Zoetis had one unusually active option.
It signals a potential long straddle strategy for investors. The question is whether it’s the best strategy to use in this instance.
Here are my thoughts.
The July 18 $155 put above had a volume of 1,011 yesterday. There were a lot of bets made on the unusually active option.
The most significant trade among the 1,011 contracts was 44, which changed hands at approximately 9:42 a.m. I count 36 trades of 10 or more, and 66 trades of less than 10, indicating that this was a combination of retail and institutional investor bets.
As I said, the $155 strike set up for a possible long straddle strategy. There are pros and cons to this play.
The long straddle strategy is applied when you expect the volatility of a stock to increase and the share price to move aggressively in either direction, but are unsure which way it will move.
To execute the long straddle, you buy a call and put at the same strike price and expiration date.
This bet generates a profit if the share price at expiration (July 18) is above $165.40 or below $144.60. However, should it fail to move up 6.7% or down 6.7% over the next 30 days, you are out the net debit of $10.40 [$5.70 ask price on call + $4.70 ask price on put] or 6.71% of yesterday’s $155.06 closing share price.
When considering these strategies, it’s easy to think that a 6.7% move in either direction over 30 days is a realistic expectation. It’s not. The expected move over the next 30 days is 5.22% in either direction.
