Staking a claim

Before Tuesday, many traders and investors had likely never head of EquipmentShare.com (EQPT), a construction-equipment rental company that began trading in late January.

But when a ticker trades nearly 120 times its daily average number of call options, it tends to call attention to itself:

With the stock mostly between $17 and $17.50 on Tuesday, 18,737 contracts traded in both the January $15 and $45 calls around 11:10 a.m. ET:

Although it’s possible the two trades were unrelated, the fact that they were the same size and occurred at the same time makes it more likely they were part of multi-legged (spread) strategy. That suggests a large trader may have bought one of the options while shorting the other. Let’s consider the two possibilities:

1. a trader bought the $15 call and shorted the $45 call (bull vertical call spread).
2. a trader shorted the $15 call and bought the $45 call (bear vertical call spread).

A long (bull) call spread is a limited-risk, limited-reward strategy that can profit if the stock price rises. It is cheaper than an outright call position because the trader collects premium from the short, higher-strike options, which offsets some of the cost of the long, lower-strike calls.

On Tuesday at 11:10 a.m., the $15 call was trading around $510 per contract, while the $45 call was trading around $35. That means a trader executing an 18,737-contract spread would save a cool $655,795 by establishing the spread at $475 instead of simply buying calls for $510. The spread’s risk is limited to its cost (in this case, $8,900,075), no matter how far the stock falls.

The “compromise” of the bull call spread is that its potential upside is also capped: The maximum profit (at expiration) occurs if the stock closes at the short call’s strike price, in which case those options expire worthless and the trader keeps all the premium collected from their sale, in addition to gains on the long calls. But the position won’t continue to profit if stock rallies above the short call’s strike price, since losses on those options will offset the gains on the long calls.

A short (bear) call spread inverts the bull spread’s intention and reward-risk profile: The position can profit if the stock falls, its profit is limited to the net credit collected (short-call premium minus long-call premium) no matter how far the stock falls, and its maximum loss occurs if the stock closes (at expiration) at the long option’s strike price.

EQPT’s chart shows the stock closed at an all-time low of $16 on July 9, three days before Tuesday’s call trades:

Aside from the tendency of most traders tend to use puts (instead of calls) to create bearish vertical spreads, it’s impossible to say whether Tuesday’s trades represented a bullish or bearish outlook on EQPT. This activity suggests a large trader may have staked a directional claim—anticipating either a possible rally to (or beyond) the stock’s early highs, or an extension of last week’s decline to fresh lows.

But it may be worth noting that in the bull call spread’s reward-to-risk ratio (maximum potential profit divided by maximum possible loss) was around 5:1, while the bear call spread’s was 1:5.

Today’s numbers include (all times ET): Retail Sales (8:30 a.m.), weekly jobless claims (8:30 a.m.), Philadelphia Fed Manufacturing Index (8:30 a.m.), Business Inventories (10 a.m.), Housing Market Index (10 a.m.), Pending Home Sales (10 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: Alcoa (AA), Abbott Laboratories (ABT), General Electric (GE), Intuitive Surgical (ISRG), 3M (MMM), Netflix (NFLX), UnitedHealth (UNH), US Bancorp (USB).

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