Markets

Time decay is key to ADP put selling

One investor apparently thinks that there is free money in Automatic Data Processing.

optionMONSTER's tracking systems detected the sale of almost 4,000 May 38 puts on the payroll-processing company. Most of the blocks priced for $0.25, and volume was more than 100 times open interest in the strike.

The trades are designed to earn small profits over the passage of time . If the shares remain above $38 for the next five months, the puts will expire worthless and the investor will keep the credit.

The put seller is probably confident that it will stay above that level because ADP tends to be a very slow-moving stock. It would also have to fall through a major support level at $45 and a key low established in August 2010.

Given those considerations, the investor appears to believe that it's a safe bet writing protection at the $38 level. The trade is an example of how investors can us options to make money from time decay , rather than a directional move. (See our Education section)

With ADP near a 52-week high, the trader sees this as a better strategy than shelling out cash to buy stock at these levels. Shares closed at $54.44 yesterday, up 0.2 percent.

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

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.


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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