Time value is key to hedge on Concho

By David Russell,

Shutterstock photo

Concho Resources has been trapped at resistance, and one investor is positioning for a drop.

optionMONSTER's Depth Charge monitoring program detected the purchase of 1,600 October 90 puts for $3.06 and the sale of an equal number of December 100 calls for $3.97. The volume was above the open interest in each strike at the start of the session, indicating new activity.

The investor collected a credit of $0.91 and now stands to profit from a decline in the oil company's share price in the next five weeks. He or she is also on the hook to sell shares for $100 if they close above that level during the two following months.

CXO is down 1.32 percent to $91.99 in early afternoon trading and has been unable to break above its 200-day moving average. The stock has also lagged the broader energy sector since June, which could be leading some investors to believe that it will remain weak.

Today's trade is probably the work of an investor who owns shares and wants to hedge that position. It's similar to a collar trade but uses the greater time value of the longer-dated December contracts to earn premium. That money is then used to buy puts that are closer to the money but expire sooner. (See our Education section for more on how calls and puts can be used to manage risk.)

Overall option volume in CXO is 5 times greater than 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: CXO

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