Volatility has been falling in Wyndham Worldwide since July, and
one trader thinks the options are overpriced.
Our monitoring programs detected the sale of 5,000 contracts each
in the October 25 calls and the October 25 puts. Both priced for
$1.25, resulting a total credit of $2.50.
The trade, known as a short straddle, is designed to generate
income now in hopes that the shares will move sideways and the
options will lose value. It's a common strategy when investors
think a stock is going to fluctuate in a narrow range.
It will make money from implied volatility in the stock falling
from its current level around 43 percent. It will also profit
because time decay will accelerate as expiration approaches on Oct.
17, meaning that the calls and puts will lose more value each day
if WYN doesn't move.
The hotel and time-share stock rose 3.96 percent to $25.23
yesterday. It rallied more than 800 percent between March 2009 and
April 2010, but has been moving sideways for most of 2010.
WYN traded over $26 in August after earnings were reported on
July 28 and management increased guidance. But the high was lower
than the peak from late April. Since then it put in a higher low
and has been holding support at its 200-day moving average (blue
The straddle seller probably thinks the shares will grind
sideways for the next six weeks. Given the credit received, he or
she will make money as long as it closes somewhere between $22.50
Overall options volume in WYN was 17 times greater than average
in yesterday's session.
(Chart courtesy of tradeMONSTER)