How Tyco trader is managing resistance

By David Russell,

Shutterstock photo

One investor is ringing the register in Tyco as the industrial stock remains parked at long-term resistance.

optionMONSTER's Depth Charge monitoring program detected the sale of 6,500 October 55 calls for $3.05 and the purchase of an equal number of October 50 puts for $0.45. Volume was more than 5 times the open interest at each strike, indicating new activity.

TYC rose 0.19 percent to $56.65 yesterday and is sitting around the same price where it peaked earlier in the year. It's also the same level where the stock rolled over in early 2005, so chart watchers could think that a top is in place for now.

Yesterday's investor probably owns shares and is using the options as a hedge. He or she collected a credit of $2.60 and is now obligated to exit their position if the stock remains above $55 through expiration. The trader is also ensured a minimum price of $50.

Because of the credit earned, the effective sale price would be $57.60 to the upside and $52.60 to the downside. The trade is a version of a collar strategy.

Some of the activity occurred around the same time that some August 50 calls and August 52.50 calls were bought below open interest. This suggests that the investor closed a covered call and replaced it with the collar. (See our Education section)

Overall option volume was 8 times greater than average in the name.

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: TYC

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