General Mills (GIS) straddle sale calls for range-bound stock movement


Shares of General Mills Inc. (NYSE: GIS ) are dropping significantly on the day Wednesday following their earnings release last night, but options volume on the tape suggests one investor expects the stock to make minimal moves during the next couple months.

GIS dropped $1.23, or more than 3%, to $35.67 during midday trading. The company announced earnings of 41 cents per share , in line with analysts' estimates, after the market closed yesterday. GIS issued downside guidance for its 2011 fiscal year, which is likely part of the reason for the decline in the stock so far on the day. During morning trading, several analysts updated their stances on GIS: Longbow raised its price target to $45 from $42; RBC lowered its price target to $40 from $41. Hefty options volume on the tape today suggests an investor expects volatility in the stock to come in and expressed that bet by selling a near-term straddle. Are you more interested in trading stock instead of options and looking to sell or buy shares of GIS? Don't miss out on $2.95 flat-rate stock trades available at OptionsHouse .

Around 11:38 a.m. EST, a block of 5,000 August 35 straddles changed hands for a premium of $2.55 per spread. The August 35 calls are home to current open interest of 30 contracts and current open interest of the August 35 puts is 9,000 contracts - it is possible that some of the puts in the August 35 line were traded to close, but a look at time and sales shows the investor traded both legs as part of a short straddle. The investor sold both options on a bet that GIS will be trading between $32.45 and $37.55 at August options expiration. If the stock is trading in this range, the investor keeps all or some of the credit collected (maximum profit of the premium collected occurs if GIS is trading right at $35 at expiration). If volatility kicks in and GIS shares move significantly lower or higher beyond the breakevens, the straddle seller will incur significant losses to the downside and theoretically unlimited losses to the upside.

GIS shares have a 30-day historical volatility of 19%. Implied volatility of the August 35 calls and puts is roughly 24%. It looks like at least one investor is convinced implied volatility will revert closer to the stock's historical volatility level during the near term and is willing to limit maximum gains to place that bet.

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.

This article appears in: Investing , Options

Referenced Stocks: GIS

Jud Pyle

Jud Pyle

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