T. Rowe Options: Lesson in Volatility

As I was going over some of the options activity in the market on this last Monday of 2008, I came across a trade in T. Rowe Price(TROW Quote) that gave me pause. An investor bought 1,000 of the Feb 30-35 strangles for $5 with the stock trading around $31.20.

Remember, a strangle is when an investor trades a call and a put with different strikes in the same direction, either buy-buy or sell-sell. Because the investor paid $5 for it, the break-evens, or where the trade is profitable, will be below $25 or above $40. Either way, the investor needs the stock to move.

Now, a trade of this size would not normally move the needle in terms of it being worthy of further discussion. After all, it is only 1,000 strangles, a total of just 2,000 contracts. But why it jumped out at me was that in this column on Dec. 10, I wrote about unusual put activity in TROW. Revisiting that activity is what is somewhat interesting. It is a story of how put prices can fall, despite the stock going down. ...