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Range-bound play on XL Capital

XL Capital is down to a key level, and investors think it's going nowhere in a hurry.

optionMONSTER's monitoring programs detected the sale of 2,500 November 18 puts for $0.87 and an equal number of November 21 calls for $0.73. Volume was more than 8 times open interest in both strikes.

The trade yielded a credit of $1.60, which the investor will get to keep if the global reinsurance company stays between $18 and $21 on expiration. Known as a short straddle, it's an example of a market-neutral strategy that makes money from the passage of time rather than a directional move. See our Education Section for more.

XL declined 3.43 percent to $28.84 yesterday and has been basing out in an area that was resistance for a long period in 2009 and 2010. That could make some chart watchers expect support to hold around these levels.

The $21 price is also potentially key to the upside because XL bounced there in June and July. It also peaked there in late August and early September. Technicians may now expect that to be the upper end of the trading range over the near term.

Another consideration in the trade is that recent turmoil in the financial system has driven up the cost of protection across the board. For example, XL's implied volatility now stands at about 50 percent, up from about 30 percent in July. Selling calls and puts is a well-established way to profit from such a situation.

Overall options volume in the name was 10 times greater than average in the session.

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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