Friday, February 11, 2011

Trade of the Day: GIS July $35/$32 put spreads 5,000x

The Trade
A trader sold 5,000 July $32 puts at $0.60 and bought 5,000 July $35 puts at $1.69 for a debit of $1.09 or $545,000.

As you can see from the risk/reward graph above, the July put spread is bearish. The maximum risk is the cost to put on the spread, the debit. The maximum profit is the dollar value of difference between the strike prices minus the debit. In this case, the maximum profit potential is $955,000. The break even underlying stock price for this spread is $33.91. At this price, the short puts would expire worthless, and the long puts would get exercised and exactly offset the debit.

The line shown in the chart above is the break even price of $33.91. The 52-week range for GIS is a low of $33.11 and a high of $38.98.

General Mills, Inc. is a global manufacturer and marketer of consumer foods sold through retail stores in more than 100 countries. The company's businesses are organized into three operating segments: U.S. Retail, International, and Bakeries and Foodservice. GIS trades an average of ... contracts daily.

General Mills will report earnings on March 23, 2011. It's interesting to note that recent grain prices haven't been this high since 2008. The U.S. Department of Agriculture predicted Wednesday that global supplies of grain including wheat, corn and soybeans would decrease 2.2% as harvests fall short. According to the USDA, U.S. supplies of corn are also limited and at 15-year lows. Furthermore, wheat and corn prices have climbed 80% or more in the last 6 months as concerns have grown about whether supplies could meet rising demand. General Mills' competitor Kellogg (K) plans to raise cereal prices 4%.

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