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