) - Out of the gate Tuesday, investors bet on decreased volatility in
by selling a LEAPS straddle amid news of the company's majority acquisition of NBC Universal.
Last Thursday, CMCSA confirmed plans to acquire more than half of NBC Universal from
. The company received mixed reactions from market analysts, including a note from Kaufman stating the deal is not a game-changer but is "shareholder friendly." CMCSA shares are currently up five cents to $17.32 today.
The fact that a deal has been announced may have been the motivating factor for one investor to sell volatility in a longer-dated series. The January 2011 20 straddle has changed hands more than 23,000 times so far today. Out of the gate, we saw one investor sell this straddle 22,000 times to collect roughly $5.93 per straddle with the stock trading at $17.02.
Heading into today's trading session, the January 2011 20 puts were home to current open interest of 532 contracts, and the January 2011 20 calls were home to open interest of 6,000 contracts, indicating investors traded both series to open.
Risk on this trade is theoretically unlimited to the upside and capped at $14.07 (the strike price minus the net credit) to the downside. It is noteworthy that this investor sold the further out-of-the-money upside 20-strike. That means the investor makes the most money if the stock rallies up, and implied volatility comes in. So this trade definitely has a bullish bias.
At the price that this straddle traded, it computes to an implied volatility of approximately 34. Given that the realized volatility for the stock over the past 126 days is 33 or less, it is rational to think that this investor thinks they might be a winner both on declining implied volatility and a rallying share price.
-- Written by Jud Pyle in Chicago
At the time of publication, Pyle did not have a position in the stock mentioned. Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."