Volatility seller targets Wyndham

By David Russell,

Shutterstock photo

Volatility has been falling in Wyndham Worldwide since July, and one trader thinks the options are overpriced.

WYN 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 line).

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 and $27.50.

Overall options volume in WYN was 17 times greater than average in yesterday's session.

(Chart courtesy of tradeMONSTER)

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
Referenced Stocks: WYN

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