Options Trading News

January 30, 2013  Wed 3:14 AM CT

One investor is betting big on Harman International's quarterly report tomorrow morning.

optionMONSTER's Heat Seeker monitoring system detected the purchase of purchase of 2,500 March 55 calls for $0.65 and the sale of an equal number of March 45 puts for about $0.65. There was almost no previous open interest in either contract, indicating that new positions were initiated.

If the maker of audio systems rallies, the calls owned will appreciate and the puts sold short will lose value, while the opposite will happen to the downside. That makes the trade similar to owning shares, but it will track the stock price less closely as time passes.

The benefit of the trade is that it cost essentially nothing to open, giving the investor a free ticket to a big move higher. But if it drops, he or she could be forced to buy shares for an effective price of $44.35 once the creidt from the put sale is included. (See the discussion of selling puts in our Education section for more.)

HAR rose 0.80 percent to $50.10 yesterday. The stock has hovered at $50 for the last three weeks, a level where it has peaked several times since 2010, so some traders may expect a big rally if that resistance is broken.

Total option volume was 18 times greater than average in the session, according to the Heat Seeker.
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The covered call and unhedged risk

I have written a few things on the Covered Call Strategy over the last two weeks. Please understand that those two previous articles plus this one do not constitute a proper, fully in-depth lesson on the Covered Call Strategy like we have in our classes at Option Monster Education. I have picked out a few topics that I believe were worth noting and today I am going to add the final one.

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