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How volatility strategy is playing Flamel

By: optionMONSTER
Posted: 3/18/2011 1:08:00 PM
Referenced Stocks: FLML

Flamel Technologies continues to see high option premiums, and one investor is exploiting the volatility to earn income.

optionMONSTER's tracking systems detected the purchase of 8,713 March 2.50 calls for $3.75 against existing open interest and the sale of a new block of 8,713 June 2.50 calls for $3.84. The transaction appears to be the roll of a position that Chris wrote about last month.

FLML fell 0.32 percent to $6.25 in early afternoon trading and has spent the last nine months trading between $6 and $8. Options on the French drug-delivery company have always fetched rich premiums, reflected in the fact that implied volatility is around 75 percent versus historical volatility in the 45-50 percent range.

The calls were probably rolled by an investor who owns the stock and is using the options to generate an income stream. Today's trade resulted in a credit of $0.09. If they continue the strategy for a year, it would translate into a yield of about 17 percent. The only risk is that FLML will drop below the 2.50 strike price, but they also won't benefit from upside in the stock.

Overall option volume in the name is 34 times greater than average so far today.