Unusual play in MeadWestvaco

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MeadWestvaco is handing out cash, and option traders want a piece of the pie.

The packaging company announced that it would return $700 million to shareholders while reducing up to $125 million in annual expenses. It had previously planned to pay out $665 million, most of which comes from the sale of forestland. MWV popped 4.82 percent to 37.38 on the news.

The options paper was bullish as well, with optionMONSTER's Heat Seeker monitoring system showing about 4,000 March 40 calls purchased for $0.50. A similar number of February 35 puts was sold seconds later for $0.40. Volume was more than 20 times the previous open interest at each strike, indicating that new positions were initiated.

Owning calls locks in the price where a stock can be purchased, while selling puts generates income but creates an obligation to get long in the event of a drop. Combining the two strategies is similar to owning shares but at much lower initial cost.

For instance, yesterday's trader paid just $0.10 but will earn 900 percent in option premiums if the stock climbs to $41 by March expiration. It's also noteworthy that the trader sold February puts because it means that he or she has an additional month of upside exposure versus downside risk. (See our Education section)

Total option volume in the name yesterday was 148 times greater than its daily average for the last month, according to the Heat Seeker. The company's next earnings report is scheduled for Jan. 29.




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: MWV

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