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Bearish trader refuses to log off AOL

By: optionMONSTER
Posted: 10/21/2011 2:16:00 AM
Referenced Stocks: AOL

AOL has been trending lower, and the bears are looking for more.

optionMONSTER's Depth Charge tracking system detected the purchase of an equal number of January 12.50 puts for $1 and the sale of 9,250 January 16 calls for $1.05. Volume was more than 7 times open interest in both strikes.

The trade resulted in a credit of $0.05 and will profit from downside in the Internet stock. The main difference between the strategy and shorting AOL is that the options will track the performance of the shares less closely as time progresses and expire worthless if the stock remains between the two strike prices.

Investors who are long underlying equity often use this approach as a protective hedge because it protects against a collapse while limiting their gains in the case of a big rally. Such a position is known as a collar . (See our Education section)

AOL rose 1.35 percent to $14.27 yesterday. It spent the first half of the year around the $19 level but plunged after the company reported an unexpected loss on Aug. 9. Revenue also lagged amid weak advertising sales.

Shares traded as low as $10.06 the next day. Yesterday's option trader may be worried about a retest of that level.

Overall option volume was 12 times greater than average in yesterday's session, according to the Depth Charge.