Reliance Steel & Aluminum (RS) Hit with a Long Vertical Put Spread

Shares of Reliance Steel & Aluminum (RS: sentiment, chart, options) have dropped more than 4.7% today, as traders worry about the sustainability of commodity prices and the current rally on Wall Street. Put option traders, it seems, are looking to cash in on a potential extended decline in RS shares. More than 1,500 contracts have traded at the stock's September 35 and 40 puts so far this morning. Delving into this activity reveals that a long vertical put spread is responsible for most of RS's put volume. Specifically, two blocks of September 35 puts, totaling 1,500 contracts, changed hands at 9:55 a.m. Eastern time on the American Stock Exchange (AMEX) for the bid price of $3.50. At the same time on the same exchange, 1,500 September 40 puts traded for the ask price of $6.10. The total outlay for this position is $2.60, or $390,000. Minus the sold September 35 puts, the trader would have needed RS to plunge some 15% to $33.90 per share in order for the September 40 puts to reach breakeven by the time these options expire on September 18. However, the addition of the sold September 35 puts lowers breakeven on the entire trade to a decline of only 6.4% to $37.40 per share. The maximum profit on this trade, at expiration, would be $2.40, or $240 per contract. source:www.schaeffersresearch.com