Time is money for position in Allstate

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One investor is turning time into money with Allstate options.

Our tracking systems detected the sale of about 7,800 October 33 calls for about $2.25. A similar number of July 32 calls was purchased at the same time for $2.60, but volume was below open interest at that strike.

This suggests that the trader had previously sold the July contracts and rolled the short position to the higher strike. He or she probably owns the insurance stock and is using the options to manage risk. (See the discussion of covered calls in our Education section.)

Yesterday's transaction cost about $0.35 and gave the trader the right to collect an additional $1 of upside on the shares. That money comes from the additional time value in the October contracts, which is collected by writing longer-dated options.

ALL rose 1.4 percent to $34.71 yesterday and is up 27 percent so far this year. Because the calls sold short are in the money , the investor has surrendered the right to profit from further upside in the stock. Instead, this is a low-risk position more akin to a fixed-income trade than owning equity.

The transaction pushed overall option volume to 6 times greater than average in the session.



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: ALL

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