Options: Call-Selling in Fred's

Recent activity in Fred's could mean an upside worth the risk.
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By Jud Pyle, CFA, chief investment strategist for the Options News Network

Today, we saw some significant upside call selling in shares of retailer



. Looking at the Aug. 15 calls, we see that 12,000 have traded in the first four hours of trading. One investor sold these calls for an average price of 42.5 cents. The current open interest in these calls is just 202.

No significant news was reported today in Fred's. The shares are currently up more than 5% to $10.94. Shares of other retailers are generally all stronger across the board today. There is not one strong headline that is driving the whole group, but rather the combination of a strong report on housing starts, accompanied by the Redbook and International Council of Shopping centers reports on retail store sales.

So what can we say about this type of action in the calls? Note that the $15 strike is more than 37% out of the money. This could very well be a long holder who is taking advantage of elevated premium levels to earn some income. In exchange, the investor is willing to let his shares go up 37%. The 52-week high in Fred's is $15.91, touched back on Sept. 19.

This activity in Fred's is something that investors should watch. As the market has rallied in the past week, we have continued to see option sellers return to the market place. Investors remember that even with as elevated as the VIX has remained for six months now, it has plenty of room to fall.

This call-selling activity does not mean that investors should run right out and sell the underlying. But it does demonstrate that some investors are continuing to come out of the wood work to take advantage of these historically high implied volatility levels to add some income to their portfolios in exchange for giving up potential upside.

In the case of Fred's, the investor is giving up upside, but not until the stock has moved up another 37%. I am not endorsing the trade one way or the other, but with a risk reward level like that, you can at least justify why one investor is doing it.

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.

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."