Flat Market Leads to Options Decay

The major indices are moving back and forth across the unchanged line in relatively quiet trading. As a result, after just three hours of trading, this morning's idea of selling a strangle in the Spyder Trust (SPY - commentary - Cramer's Take) has enjoyed 20 cents of time decay and a decline in implied volatility as that strangle's value has dropped from $3.00 to $2.80. Trust me, stick with it, as I just can't see a 6% move in the next week. This thing is going out worthless. Perhaps a fitting epitaph for my tombstone.

Interesting option trade in Wachovia (WB - commentary - Cramer's Take), as someone bought a 2009 LEAP strangle. Specifically the $20 put and $40 call each traded 11,000 contracts for a total price of $4.20 for the strangle. With the stock currently trading $29.50, this is basically a bet that shares of the bank will drop below $15.80 or above $44.40 over the next 10 months. That would be a 42% move.

Of course, this could have been done in combination with an existing position or some other trade and can be pulled off prior to the January 2009 expiration.

For the second consecutive day, paint maker Sherwin Williams (SHW - commentary - Cramer's Take) is seeing heavy put buying in its June $50 put, even as the stock is bouncing nicely off the 52-week low of $50. The stock has gained over 5% to $54.25 in the past two days, but open interest in that June put has swelled from less than 100 contracts last Monday to over 8,000 as of this morning. And it has traded another 6,500 contracts so far today.

Last week, the company's CEO, Christopher Connor, painted a bleak view of the outlook for the homebuilder sector. He predicted that the housing market would not meaningfully rebound before 2009. That of course means reduced demand for paint in 2008. Also, if sales of existing homes continue to remain weak, then fewer homeowners will look to give their house a fresh coat of paint this spring -- which is seasonally the strongest period of home sales

That bleak view led some options traders to assume that shares will eventually hit a new 52-week low below $50 by June.

ALL STEVEN SMITH BLOG ENTRIES | POST A COMMENT | READ COMMENTS  

---

Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.

To read more of Steve Smith's options ideas take a free trial to TheStreet.com Options Alerts.