Complex hedge in Approach Resources

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Approach Resources is trying to climb, and one investor is worried about a drop in the near term.

optionMONSTER's Depth Charge monitoring program detected the purchase of about 1,700 October 30 puts for about $1.50. Equal amounts were sold in the January 40 calls for $1.30 and the October 25 puts for about $0.20, resulting in a net cost of roughly zero.

The investor is probably hedging a long position in the shale-energy company and will earn $5 if AREX falls from $40 to $35 in the next 5-1/2 weeks. He or she is also committed to sell the position for $40 if the stock closes above that level at expiration in mid-January.

AREX, which rose 0.16 percent to $31.78 yesterday, peaked at $39.18 earlier this year. Domestic energy companies have been increasingly popular among investors as advanced drilling technologies bring new U.S. fields online and political tensions abroad reduce the appeal of operating overseas. (See researchLAB for other companies in the space.)

Programming that exit at $40 makes sense because it would represent a new high for the name and would be above the initial entry price. (See our Education section for more on the strategy, which combines elements of a vertical spread with a covered call .)

Total option volume in the name was 19 times greater than average in the session.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.


This article appears in: Investing , Options

Referenced Stocks: AREX

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