Options: One-by-Two Spread on State Street

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

An investor boosted call volume in State Street(STT Quote) right out of the gate yesterday. STT shares closed down $1.30, that's nearly 3%, at $47.20 on news that the Securities and Exchange Commission could bring action upon the Boston-based bank for violating securities laws.

An investor sold 5,000 in-the-money July 44 calls and bought 10,000 July 50 calls in a one-by-two call spread -- the customer collected $2.50 from the trade. The investor needs STT shares to stay below $46.50 or rocket above $53.50 to make money. The July 44 calls closed down $1.20 on the day and were home to open interest of 5,500 contracts. The July 50 calls dropped 50 cents and were home to open interest of approximately 14,000 contracts.

Normal daily options volume across all strikes in STT is about 2,900 contracts. Yesterday, 19,000 options changed hands, thanks in large part to this one-by-two. The volume-weighted average of the July 44 calls is $4.70 and the July 50 calls have a VWAP of $1.10 (the difference between the VWAP of two July 50 calls and VWAP of July 44 call equals the premium the investor collected on the trade). ...