Volatility seller takes a shot at Take-Two


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 months.

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.

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: TTWO



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