Option volume has ramped up today on KeyCorp (KEY), with activity rising well beyond the usual level on both the call and put side of the tape. Taking a closer look at some of the major block trades on this regional banking issue, it appears that a single spread strategist is responsible for a healthy portion of this option volume.
Specifically, the trader purchased a block of 10,000 June 10 calls for $0.50 each, and simultaneously sold 10,000 June 8 puts for $0.25 each. The result was a net debit of $0.25 per pair of contracts -- which means the speculator can begin collecting profits on those purchased calls if KEY rallies beyond $10.25 by June expiration.
Meanwhile, the lower break even on the trade stands at $8.25 (the sold put strike, plus the net debit). Since it doesn't appear that this option trade was tied to a corresponding position in KEY shares, losses could be substantial if the stock drops below $8 prior to June expiration.
In fact, this spread more or less mimics the risk/reward profile of a long stock position. A true synthetic long spread is typically initiated at a single strike, so this example would be described as a "split strike" synthetic long.
Scanning the headlines for KEY, it looks as though some unsubstantiated buyout buzz is driving today's bullish option activity. Rumors indicate that the Cleveland-based bank could be acquired by Toronto-Dominion Bank (TD) for $10 to $11 per share. As a result, KEY is up about 3% at last check.
Elizabeth Harrow is a senior equities analyst and editor in the research department at Schaeffer's Investment Research.