Virgin Media is consolidating after a big run, and one trader
apparently thinks it will remain trapped in this range until early
optionMONSTER's tracking programs detected the sale of 8,730
January 16 puts for $0.40 and 8,730 January 22.50 calls for $1.58,
resulting in a credit of $1.98. Volume was greater than open
interest in each strike, indicating that a new position was opened.
The trade, known as a short strangle, is designed to profit from
VMED trading between the two strike prices. However, thanks to the
credit earned, it will make money as long as the stock stays above
$14.02 and below $24.48 (orange lines on chart).
The provider of media and wireless services fell 0.05 percent to
$21.74 yesterday. It climbed more than 500 percent between late
2008 and the beginning of August and has now returned to the same
area where it had support in 2006 and 2007.
Some traders may expect that level will now offer resistance,
giving them confidence to sell the strangle. The trade also
reflects a belief options premiums are too high in the stock
relative to its propensity to move.
Implied volatility, a key ingredient in the price of options, is
over 40 percent in VMED, greater than the 35 percent volatility
recorded over the last 30- and 50-day periods. Selling strangles is
a common strategy for investors betting that implied volatility
will drop. (See our Education section)
The trade pushed total options volume in the stock to 6 times
greater than average in yesterday's session.
(Chart courtesy of tradeMONSTER)