Back to Main

Sigma trader sells calls to manage risk

By: optionMONSTER
Posted: 5/19/2010 8:17:00 AM
Referenced Stocks: SIGM

Sigma Designs has been unable to rebound from a late-2009 selloff, and one investor is selling calls to manage risk.

optionMONSTER's tracking systems detected heavy activity in the July 10 contracts, which traded more than 5,200 times for $1.40 to $1.70. Sales dominated the activity and volume was 17 times greater than open interest in the strike.

SIGM Chart The media chip systems company fell 5.77 percent to $10.78 yesterday and is down 11 percent in the last month. SIGM has been consolidating below its 200-day moving average all year and failed to mount a rally after its last earnings report on March 3, even though profit and revenue crushed analysts' forecasts.

The next release is scheduled for after the bell on May 26.

The calls were probably sold by a shareholder looking to establish an exit price of $11.40 to $11.70 on the shares. The transaction allowed the investor to earn premium from the stock's 52 percent implied volatility level, which is up from 43 percent a month ago.

The additional income will also protect the position even if SIGM falls below $9, which makes it easier to hold the shares through July expiration. The strategy is an example of how an investor can use options to manage a position that he or she may like fundamentally but believes isn't yet ready to rally.

The call selling pushed total volume in SIGM to 10 times greater than average.

(Chart courtesy of tradeMONSTER)