Unusual low-risk trade in Tata Motors


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Option volume surged in Tata Motors today as an investor implemented an unusual low-risk strategy in the Indian automaker.

TTM Chart Our tracking programs detected the sale of 2,900 October 15 calls for $2.80 at about the same time that 406,000 shares were purchased for $17.15. The trades accounted for almost all the options activity and two-thirds of the stock volume in the name so far today.

The transaction lowered the investor's cost basis in most of the stock to $14.35. He or she stands to earn 4.5 percent as long as TTM closes at or above $15 on expiration. The shares are down 0.35 percent to $17.09 in morning trading.

This is a rare instance of an in-the-money covered call strategy, where an investor takes advantage of the time value in the longer-dated contracts to earn income. It's an example of the ways that options can be used to craft positions with varied risk profiles and that match unique expectations for how a stock will trade. (See our Education section)

TTM rose more than 500 percent between March 2009 and April, and has been retreating since. Today's option trader may expect the shares to hold $15 because it was an key support level between early 2006 and early 2008, and is also near the important 200-day moving average (purple line on chart).
The transaction pushed overall options volume in the name to five times greater than average so far today.

(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.

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This article appears in: Investing , Options

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