Options: Betting on a Range in Tyco

By Jud Pyle, CFA, chief investment strategist for the Options News Network

Tyco(TYC Quote) did not announce any news today, but one investor boosted options activity on a bet that the diversified electronics company's stock is range bound.

An investor sold 6,500 Oct. 26-27.5 strangles at $4.05 per spread with the stock currently trading at $26.84. The out-of-the-money Oct. 26 puts, currently trading down three cents, are home to current open interest of 742, while the out-of-the-money Oct. 27.5 calls, also currently trading down three cents, are home to current open interest of 927, according to ONN.tv's Sidewinder report. We can see from the declining CBOE Volatility Index (VIX), which is currently trading at 28.37, that lower implied volatility affects option prices, regardless of movement in the underlying security.

Tyco shares are currently down two cents on the day and have rallied more than 70% since reaching a 52-week low of $15.65 on Nov. 20. Since the beginning of May, Tyco shares have been trading between $25 and $30.

It's interesting that we saw one investor with high risk tolerance in the stock as the VIX is currently below 30. This strangle seller betting on a range in Tyco can lose money if these shares rise or fall. As the VIX continues to decline on the day, we could continue to see more strangle sellers with greater risk appetites.

Meet Jud Pyle live in Las Vegas at the Forex & Options Expo on Aug. 2-4.

Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) 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.