Upside strategy in Microchip Technology


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One investor wants to be long Microchip Technology, which has been trending lower since mid-January.

optionMONSTER's Heat Seeker monitoring system detected the purchase of about 1,250 October 38 calls for $0.55 and the sale of an equal number of October 30 puts for $1.06. Volume was more than twice open interest at both strikes.

There are two ways that the strategy can profit. The first is simply from the fact that the put sale produced a credit of $0.51, which the investor will keep if the chip maker remains above $30 by expiration. The second way is if the stock climbs because of the long calls owned.

The position will track movements in the share price less closely as time passes and expire worthless if shares remain between $30 and $38. That's been its approximate price range since last summer. It will lose money only below $29.49.

MCHP fell 2.59 percent to $33.79 on Friday. The last two earnings reports have been unremarkable, and the company announced on Thursday that it would acquire Standard Microsystems for $939 million in cash.

The option trade is also interesting because volatility was 28 percent in the puts versus just 22 percent in the calls. This means that the market is pricing in a greater probability of downside than upside--a perception the investor exploited by selling puts. (See our Education section)

More than 4,600 contracts traded in the session, almost 9 times the normal daily average.

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

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