It looks like one institutional trader is bracing for a potential 26%+ decline in shares of economically sensitive Deere (DE). The bearish investor enacted a butterfly spread this morning in what can only be viewed as a leveraged bet that the overall market is going to decline substantially between now and the first quarter of 2010. We know the trader isn’t on the Goldman desks after their recently bullish note on commodity futures.
DE – Deere & Co. – Shares of the agricultural equipment maker are up more than 1% today to $54.15, but options activity on the stock suggests investors are bracing for potential bearish movement in the price of the underlying through March of 2010. One DE-pessimist enacted a butterfly spread in the March 2010 contract. The investor might be protecting the value of a long stock position with the spread. Otherwise, the trader is outright bearish on Deere, and is hoping to amass profits to the downside by expiration. The spread involved the purchase of 15,000 puts at the March 50 strike for a premium of 2.70 apiece [wing 1], and the purchase of another 15,000 puts at the lower March 30 strike for 10 cents each [wing 2]. The wings of the butterfly were spread against the sale of 30,000 puts at the central March 40 strike for 60 cents premium apiece [body]. The net cost of the bearish play amounts to 1.60 per contract. Maximum potential profits of 8.40 per contract are available to the investor if shares plummet 26% from the current price to $40.00 by expiration in March. Profits, or downside protection on a long position in the underlying, kick in if Deere’s shares decline through the breakeven price of $48.40.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.