Markets

How volatility trade is playing Calpine

The price of Calpine options has been stabilizing this year after a long drop, and now one trader is looking for that to reverse.

optionMONSTER's Depth Charge tracking system detected the purchase of 10,000 January 2013 5 puts for $0.20. The trade accounted for almost all the volume in the power-generation company and came against no existing open interest.

CPN fell 1.84 percent to $15.50 yesterday. It would have to lose more than two-thirds of its value for the options bought yesterday to be in the money, but the trade can also profit implied volatility going up.

It's been hovering around 30 percent since December, down from more than 100 percent three years ago, but has refused to push below the current level.

Longer-dated options tend to have a higher vega, which makes the more sensitive to changes in volatility. The January 2013 puts are also far out of the money, which means they're less tied to changes in the stock price. That makes them an ideal instrument for betting on higher volatility. (See our Education section)

While the activity wasn't totally bearish for CPN, it has a negative bias because implied volatility normally goes up when a stock falls. The investor also bought puts rather than calls, which indicates a belief that it's more likely to drop than rally.

Overall option volume in CPN was 42 times greater than average in the session, according to the Depth Charge.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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