Frontline (NYSE:FRO) is engaged in the ownership and operation of tankers, including oil/bulk/ore carriers. The company operates very-large crude carriers, which are between 200,000 and 320,000 deadweight tons and Suezmaxes, which are vessels between 120,000 and 170,000 deadweight tons. In addition, Frontline has three dry bulk carriers. The company operates through subsidiaries and partnerships located in Bermuda, Isle of Man, Liberia, Norway, Panama, Singapore, Sweden, Cayman Islands, the United States and the Bahamas. Frontline is also involved in the charter, purchase and sale of vessels.
This issue emerged in a scan for technically "bullish" stocks with unusually large (OTM) option premiums. In fact, FRO's chart pattern was near the top of the list among short-term "momentum" plays and the bid ($0.60) for the MAR-$45 put was certainly generous, even with the recent volatility in the issue. However, our research soon uncovered the reason for the disparity; a cash dividend of $3.50 will be issued on March 18, the last day of the option expiration period.
While the current upward trend is likely to carry FRO into the mid-$50 range, it is necessary to protect for the eventual adjustment to its share value and the remaining downside margin is a bit "too close for comfort" in the MCM portfolio. However, the position is certainly viable for traders with a slightly more-aggressive outlook and it also warrants consideration by those who routinely short the underlying stock to "cover" sold put options. It will not be listed in the monthly portfolio summary.
Dividend/Earnings Information: http://hugin.info/182/R/981803/145809.pdf
PLAY (less conservative - bullish/credit spread):
BUY PUT MAR-40.00 FRO-OH OI=271 ASK=$0.20
SELL PUT MAR-45.00 FRO-OI OI=668 BID=$0.60
INITIAL "NET-CREDIT" TARGET = $0.45-$0.55
POTENTIAL PROFIT (X 5 contracts) = $225
RETURN ON INVESTMENT (max) = 9%
COST BASIS = $44.55
LOSS-LIMIT/EXIT POINT = $47.00 (cons) - $45.25 (aggr)