Domino's faces range-bound trade

By David Russell,

Shutterstock photo

Domino's Pizza is near an all-time high, but one trader apparently thinks that it will stop moving.

optionMONSTER's monitoring programs detected the sale of about 3,000 December 32 calls for $1.65 and a matching number of December 32 puts for $1.30. Volume was more than 7 times open interest in both strikes.

The trade generated a credit of $2.95, which the investor will get to keep if DPZ closes at $32 on expiration. Known as a short straddle , the trade is a market-neutral strategy designed to make money from the passage of time rather than a directional move.

DPZ is down 0.98 percent to $32.22 in early afternoon trading but has more than doubled so far this year. The restaurant company is enjoying a surge of business after changing its recipe in 2009, and repeatedly issued strong earnings reports. (See our new researchLAB service for key news events )

Given the big gains, some investors now think it will now pause, and selling a straddle is an ideal way to profit from that expectation. The investor may be a long-term shareholder who's willing to sell some of their stock if DPZ continues higher--which is what the short position in the calls would force them to do.

He or she may be willing to buy stock if they drop below $32, which is what the short position in the puts would force them to do. Some traders also sold the December 33 calls and the December 33 puts, following a similar logic.

Overall option volume is 17 times greater than average so far today.

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

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

This article appears in: Investing Options
Referenced Stocks: DPZ

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