Options Trading News

May 6, 2011  Fri 12:21 PM CT

A wave of advertising money has driven CBS to its highest level in more than three years, and traders are writing options.

The strategy is a common response when investors remain positive on a stock but believe that its moves could be done for the time being. In the largest transaction, 10,000 September 23 puts were sold for $0.80 and 10,000 September 30 calls were sold for $0.80. Volume was more than twice open interest in both strikes.

CBS is down 0.11 percent to $26.69 in afternoon trading but still up about 90 percent since the end of last summer. The most recent push came this week, when earnings and revenue exceeded estimates.

Today's option trade, a short strangle, reflects an expectation that CBS will stay between $23 and $30 through expiration. Profit erodes outside of that range, but today's trade could be more complicated than that.

For instance, it could be the work of an investor who's ridden the stock higher. He or she is essentially agreeing to accept a maximum price of $30 if CBS keeps rising or to buy more shares at $23 if they fall. In return, they collected a credit of $1.60.

The transaction is an example of how traders can use options to manage existing positions or make money from the passage of time. (See our Education section)

Shortly after, 2,500 June 25 puts were sold for $0.50--a similar strategy as the strangle trade.

Overall option volume in CBS was 5 times greater than average so far in the session.
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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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