Take-Two Interactive has made a big move, but one trader is
writing options on a hunch that premiums are too high.
Our tracking systems detected the sale of 10,000 contracts each in
the June 16 puts for $1.40 to $1.45 and the June 16 calls for $1.62
to $1.65, resulting in a premium of $3 to $3.10. Volume was more
than 35 times open interest in both strikes.
TTWO rose 1.64 percent to $16.14 yesterday and has almost doubled
since August. Traders have pushed implied volatility in the name to
about 43 percent, while the stock has only demonstrated a
propensity to move at a 32 percent annualized rate in the last two
Investors often sell both calls and puts to exploit such a
situation. The trade is known as a short straddle because it
straddles a single strike price--in this case, $16. If TTWO closes
at that level on expiration, the traders will keep the premium. The
stock can rise or fall by about $3 without them losing money.
The trade is an instance of a market-neutral strategy, which make
money from the passage of time rather than a directional move. (See
our Education section)
TTWO, which makes video games, is best known for its "Grand Theft
Auto" franchise. The company's last earnings report on Feb. 9
crushed expectations, fueled by strong sales of "NBA 2K11." The
company also raised guidance, following similarly strong
announcements in December and September.
The short straddle pushed total option volume in the name to 11
times greater than average in yesterday's session.
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