When in doubt, sell premium: That's what some traders were
optionMONSTER's monitoring programs detected unusual call and put
activity in several companies as investors used so-called strangle
trades to turn time into money.
The most noteworthy transaction was in Men's Wearhouse, where an
investor sold 2,500 each of the January 24 puts and the January 25
calls for $0.90 and $1.05, respectively. He or she will keep the
$1.95 premium if MW closes between the two strike prices on
The trade comes after weak fourth-quarter guidance caused the
apparel stock to gap lower on Dec. 8. It seems to have found
support around its current level, but the trader may expect more
selling if it climbs back toward $25. MW ended yesterday's session
up 1.61 percent to $24.62.
Auto-parts maker Magna International, which is near an all-time
high of $52.42, drew a similar trade: Blocks of about 1,300
contracts were sold in both the June 40 puts for $1.30 and the June
60 calls for $1.60. The trade will earn a maximum profit of $2.90
if MGA closes between $40 and $60, which is more than 15 percent
above and below its closing price of $50.50 yesterday.
The strangles come with the S&P 500 stalling around the same
point where it traded immediately before the 2008 market crash.
Many individual stocks have encountered resistance at comparable
levels on their charts, and some traders may expect the broader
indexes to follow a similar pattern.
If the market does remain trapped in this range, it makes sense to
use market-neutral strategies that earn money from the simple
passage of time rather directional trades that need stocks to rise
or fall. (See our Education section)
Another strangle was detected in Mosaic, a fertilizer stock that
almost doubled between early July and mid-November but has been
drifting lower since. This time, 3,200 March 65 puts were sold for
$5.10 and 3,200 March 72.50 calls were sold for $3.05, resulting in
a total credit of $8.15.
MOS fell 1.61 percent to $65. Unlike MW and MGA, it's near the
lower end of the strangle's range, which suggests that the trader
sees less downside risk. He or she might expect it to hold support
around the $64 level where it gapped higher on Oct. 8.
The activity in MOS was within the stock's normal trading volumes.
In MGA and MW, however, activity was unusually heavy, with total
options volume 41 times and 178 times above average in each,
(Chart courtesy of tradeMONSTER)