Tempur-Pedic draws unusual bet

By David Russell,

Shutterstock photo

One investor is looking for a good number when Tempur-Pedic reports earnings results this afternoon.

optionMONSTER's monitoring programs detected the sale of more than 2,600 October 65 puts for $3.60 to $3.90 against open interest of just 373 contracts. Shares are up 3.97 percent to $63.62 in morning trading, so these options are in the money.

The trade represents an unusual way to get long the mattress company, which is enjoying a wave of strong demand for its products. The last earnings report on July 27 beat expectations on the top and bottom lines. Management also raised guidance for the third time this year.

By selling in-the-money puts, the investor will make money from TPX pushing higher. The maximum profit will occur at or above $65 because the contracts will then be rendered worthless. If shares hold their ground, the trader is protected down to about $61.20 because of the premium earned.

The strategy works because option premiums tend to remain inflated before earnings. Even if shares don't move at all, the value of the puts will quickly drop after the big news event has passed.

Overall option volume in TPX is almost triple the daily 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: TPX

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