Options Trading News

February 12, 2013  Tue 4:14 AM CT

Diamond Foods spiked higher with bullish option activity yesterday on news that financial-management firm BlackRock had taken a stake in the snack company.

More than 5,600 February 16 calls traded in a strong buying pattern yesterday as premiums rose from $0.05 all the way up to $0.65, according to optionMONSTER's Heat Seeker system. The volume was 5 times the strike's open interest of 1,063 contracts before the trading began, indicating that these are new positions.

These calls lock in the price where shares can be purchased and will provide significant leverage if DMND continues to rally through expiration at the end of this week. But given their short lifespan, they will rapidly lose value if the stock reverses course. (See our Education section)

DMND rose 15.2 percent to $16.60 yesterday after BlackRock disclosed in a Securities and Exchange Commission filing that it had purchased 7.85 percent of the company. The move broke the stock out of a tight range mostly between $13 and $15 since mid-November.

Shares had collapsed from the $90 level in late 2011 after questions arose about the company's accounting practices, which led Procter & Gamble to withdrew its offer to buy the Pringles brand from Diamond.

Total option volume in the name was exceeded 16,500 yesterday, compared to a daily avearge of 1,160 contracts in the last month. Calls outpaced puts by 5.5 to 1, a reflection of the session's bullish sentiment.
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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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