Volatility trade targets struggling Avon

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Call volume surged in Avon Products yesterday, but it doesn't look bullish.

optionMONSTER's tracking systems detected the purchase of 9,800 January 2013 22 calls for $0.95. A large block of shares was sold less than two minutes later, suggesting the use of a so-called delta-neutral trade.

The strategy hedges the long position in the calls with the short position in the stock, making the investor directionally neutral on the cosmetics company. Instead of a move specifically higher or lower, the trader is betting that option premiums will increase.

It makes sense because AVP is in the midst of a leadership transition after management slashed guidance and authorities started investigating the company in October. Last month it gapped higher after announcing that long-time CEO Andrea Jung would be replaced.

The trader behind yesterday's option play probably thinks that the market will price in a big announcement soon, which would mean higher levels of implied volatility . He or she may be targeting the next earnings release, which will probably occur early next month. By picking longer-dated contracts, the trader is also more leveraged to volatility because of a higher vega . (See our Education section)

AVP closed yesterday's session at $17.71, up 1.37 percent. Its option volume was more than 4 times the average amount.



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: AVP

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