Options Trading News

October 3, 2012  Wed 11:34 AM CT

A large range-bound trade is targeting MetroPCS Communications, which has been on a wild ride in the last two days amid talks of its merger with Deutsche Telekom's T-Mobile division.

PCS is down 7.89 percent to $12.50 this afternoon but still hasn't given up all of the gains from yesterday. Shares of the wireless-communcation carrier started yesterday at $11.61 and popped as high as $14.51, their highest price since the stock collapsed in August 2011.

More than 117,000 PCS options have changed hands today, and much of that is tied up in a single trade. optionMONSTER's systems detected trades of more than 26,000 November 12 puts and more than 35,000 November 13 calls. The big action came as one trade with 25,000 each of those options going off together.

The calls were sold for $0.40 and the puts for $0.55, the bid prices of each. The previous open interest at each price was fewer than 1,600 at the start of the day, so this is a new position.

The trader is apparently selling a strangle on the thesis that volatility will quiet down in coming weeks. The position can profit if PCS is between $11.05 and $13.95 at expiration. (See our Education section)

Depending on how it is hedged, the strategy can also profit if the actual volatility of the stock is lower than that implied by the option prices. The implied volatility of the options is 42 percent, while the 30-day historical volatility has jumped to 58 percent but was below 40 percent last week.
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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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