Options Trading News

March 19, 2013  Tue 3:16 AM CT

RD Micro Devices has been trying to rebound from a sharp drop, but some traders have other ideas.

optionMONSTER's tracking programs detected the sale of almost 2,900 April 5 calls for $0.15 yesterday. Volume was more than twice the previous open interest at the strike, indicating new activity.

The investor is now obligated to sell shares in the semiconductor company for $5, no matter how high they might go. He or she probably owns the stock and is using the calls to earn income while holding the long position, hedging some of the exposure. (See our Education section for more on covered calls.)

RFMD fell 3.63 percent to $4.80 yesterday. It had peaked over $5.40 last month but fell sharply on Feb. 21 when Qualcomm announced that it would compete in the company's market for radio-frequency chips. The stock made a lower high on Friday and is now back below its 50-day moving average, which could make some traders believe that it will struggle in the near term.

Shares in the company had been advancing before that setback, with profit ahead of expectations the last two times it reported quarterly results.

Yesterday's call selling pushed total option volume in the name to almost 7 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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