Options: Betting on a Range in Starwood
Jud Pyle, CFA
06/11/09 - 04:19 PM EDT
By Jud Pyle, CFA, chief investment strategist for the
Options News Network
Starwood Hotels & Resorts Worldwide (HOT) shares have rallied more than 150% since hitting a 52-week low on March 6, when the stock dipped to $9.52, but at least one strangle seller is now betting HOT will stay in a range.
HOT shares have traded within a distinct range in the last few months. Despite the slight moves in HOT stocks recently, an investor sold more than 16,000 of the Aug. 24-27 strangle for about $4 near noon EDT. The investor sold the strangle, comprised of these out-of-the-money options, on a bet that HOT shares will expire between the strike prices come August expiration. The Aug. 24-27 strangle closed at $4.15 last night.
In afternoon trading, the Aug. 27 calls were offered at $1.55, down 50 cents so far today, while the Aug. 24 puts were offered at $2.10, down 15 cents. This is a classic example of how declining implied volatility affects option prices, regardless of movement in the underlying security. Those who owned the shares and the long puts would be losing on both today -- this "hedge" wouldn't be working so well!
The stock is now trading down 30 cents at $24.98. The Aug. 27 calls are home to open interest of 204 contracts, while the Aug. 27 puts are home to open interest of 440 contracts. This computes to an implied volatility of 51.8 in the Aug. 27 calls and 58.7 in the Aug. 24 puts, according to ONN.tv's Sidewinder report.
This investor is neither bearish nor bullish, but selling strangles is not for the faint of heart. There is risk in either direction, as the strangle seller can lose if the stock rises or falls. It's noteworthy that with the
CBOE SPX Volatility Index, or VIX, below 30 for the fourth consecutive day, we're seeing at least one investor with higher risk tolerance in HOT stock. If risk tolerance spreads, we could continue to see more strangle sellers and a declining VIX.
Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.
