Options Trading News

May 17, 2013  Fri 2:14 AM CT

One investor apparently thinks that it's make-or-break time for Southwest Airlines now that the stock rallied back to a key level.

optionMONSTER's tracking systems detected the purchase of 5,000 June 14 calls for $0.50 and 5,000 June 14 puts for $0.40. Volume was more than triple the previous open interest at each strike, indicating that this is new activity.

The trade cost $0.90 and will make money if the discount airline drops below $13.10 or surges above $14.90 before the options expire five weeks from today. Known as a long straddle, the position will also profit from a general increase in volatility. (See our Education section for more on straddles and strangles.)

LUV fell 1.39 percent to $14.14 yesterday but has rocketed 58 percent in the last six months. The stock has been hovering near its highest level since the market crash of October 2008, which could be leading some chart watchers to believe that shares will either fall sharply or move even more dramatically to the upside if resistance is broken.

The straddle would profit either way. But if LUV doesn't move, the calls and puts will both dwindle in value.

Total option volume was 8 times greater than average in the session.
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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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