Options Trading News

October 9, 2013  Wed 3:16 AM CT

General Dynamics has had a good run, but now traders are betting on a period of weakness.

optionMONSTER's trade scanners detected the purchase of 1,500 January 90 calls for $1.85 and the sale of an equal number of January 85 calls for $4. Volume was below open interest in the 90s, so there are two possible explanations for the activity.

One is that the trader had previously sold the higher-strike contracts and is now rolling the position down to the January 85s. Alternatively, both halves of the trade could be new activity, in which case this is a credit spread.

Either way, the trader collected income of $2.15, which he or she will keep as profit if the defense contractor closes below $85 at expiration in early 2014. (See our Education section)

GD fell 1.39 percent to $84.97 yesterday. It rallied 25 percent in the first seven months of the year, returning to levels last seen in September 2008, immediately before the sub-prime mortgage crash. But it's been drifting lower since, which could make some traders think that the stock has topped.

In addition to the activity in the January 85s and January 90s, volume surged in other contracts during the afternoon as investors looked to capture the company's quarterly dividend. More than 24,400 GD options traded in all yesterday, compared with just 1,610 in a typical session.
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As I stated in last week's article, a break out or a break down needs to have a couple things happen before it is considered a confirmed break out or break down. The only problem is that in today's market where things move much more quicker than they did just a few years ago, two days could wind up being the majority of the expected movement, if not the whole movement.

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