For Nucor Corporation (NYSE:NUE) Investors, it May Pay to be Patient

Iron and steel mining name Nucor NUE has settled into a trading range of late, bouncing back and forth between the 35 and 40 levels since early July. Judging from some volume in the Nucor options pit Monday, it looks as though a large-scale investor may be targeting a breakout from this range but not until several weeks in the future.

An hour after the trading week kicked off, large blocks traded in the NUE November 40 and December 40 calls.  It looks as though the investor sold 17,304 of the November-dated calls for 51 cents apiece and bought 8,652 of the December calls for $1.02 each creating a one by two calendar spread.  Twice as many short-term calls were sold, making this a costless trade before commissions ($0.51 credit times two = $1.02 debit).

The trader is evidently selling the short-term calls to finance the purchase of the longer-dated long call, in the hopes that NUE will begin to advance after the November calls expire. This is a good example of how the time element of options trading can make all the difference between success and failure. For this trade to have a shot at profitability, the shares have to stay put for three weeks and then begin to rally, overtaking the 40 level between November expiration on November 19 and December expiration on December 17.

If the November options expire in-the-money, the investor will likely be assigned, creating a short stock position with the maximum loss unlimited and the maximum gain capped if the stock goes to zero.  The long December calls would cover half of this assignment and the trader will have a large short delta position to deal with. He would also have to buy enough stock to cover the remaining 865,200 shares (we have no way of knowing if this investor already owns NUE shares).

If the November positions expire out-of-the-money, the investor will effectively be long the December calls with a cost basis of zero.  At this point, he could simply sell them to close, and any premium collected would be profit on the overall trade.  They could also keep them as a long call position if they expect a rally in the stock.

The breakeven price for this long call is technically $41.02, although this particular investor's premium was offset by selling the front-month calls.  Gains are theoretically unlimited for a long call and losses are limited to the premium paid.

NUE reported earnings on October 21 and its most high-profile peers announced last week. There may not be any earnings-related volatility until the next reporting season in late January, long after both the November and December options expire.

Photo Credit: Kekka

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