Massive leverage in Tyco strategy

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One investor is using options to generate massive leverage in Tyco Electronics.

Our tracking systems detected the purchase of 11,000 January 60 calls for $1.20 and the sale of 6,300 January 40 puts for $1.95. Volume was more than 25 times open interest in both strikes.

The trade is similar to buying shares in the industrial conglomerate, which has been trapped below $57 for the last decade. The investor crafted it in a way that exploits the higher implied volatility in the downside puts, at 31 percent, versus 23 percent in the upside calls. This differential indicates that the options market is pricing in a greater risk of a drop in the long term.

Selling puts let the investor take advantage of the situation to earn income. As a result, he or she paid just $91,500 to enter a position that will perform similarly to owning almost $10 million of stock. (See our Education section)

TYC rose 0.93 percent to $49.71 yesterday and is up about 6 percent so far this year.

Yesterday's bullish trade accounted for more than 90 percent of options volume in the session. Total activity was 12 times greater than average, according to the Heat Seeker.




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: TYC

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