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Trade #7 – Office Depot (ODP)

By Nick Atkeson and Andrew Houghton

Office Depot (ODP) fell from well over $40 per share to a low of 59 cents during the 2008 bear market. Today, it is around $5 per share, and institutional option investors believe the stock is still too cheap.

On July 27 and 28, in the wake of the company missing earnings and with the stock trading around $4.50, these investors bought roughly 45,000 Jan 5 Calls (ODPAA) and sold roughly 45,000 Jan 5 Puts (ODPMA). This "risk-reversal" trade shows a tremendous amount of conviction that the stock will be above $5 per share in January.

If you believe the corporate world will continue to improve from Labor Day through the end of 2009, ODP appears to have set a downside limit price of $5 combined with uncapped upside potential. With the stock currently trading at about $5, ODP is offering a profit ticket in a better economy.

NEXT – Trade #8