Position seeks income from Dynegy

By David Russell,

Shutterstock photo

A trader wants to harvest premium in Dynegy, which is getting acquired by Blackstone Group.

optionMONSTER's tracking systems detected the sale of 10,000 December 5 calls for $0.15 and 10,000 December puts for $0.65, resulting in a credit of $0.80. The trade comes amid heavy option activity in the power producer, with volume running 10 times greater than average.

DYN Chart DYN is up 1.55 percent to $4.60 in early afternoon trading. On Thursday it touched an eight-year low of $2.76, only to explode higher by 63 percent the next day when the purchase was announced.

BX agreed to pay $4.50 a share for the company, which is still laden with debt from the days of Enron and energy trading in the late 1990s.

Today's option strategy, known as a short straddle, is designed to earn income from the passage of time. If the takeover closes at the agreed-upon price later this year, the puts will be worth $0.50 and the calls will erode to zero, resulting in a net profit of $0.30. They'll lose money if it falls below $4.20 or climbs above $5.80.

The straddle is an example of how investors can use options to make money even when a stock is dead in the water. (See our Education section)

Disclosures: I own Blackstone shares.

(Chart courtesy of tradeMONSTER)

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: DYN

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