By Jud Pyle, CFA, chief investment strategist for the Options News Network
are bucking the markets' positive trend and are showing weakness so far on the day following a downgrade ahead of the opening bell this morning. At least one investor is betting on a range in the stock throughout the longer term by selling a strangle.
CMCSA is currently down nearly 3%, or roughly 51 cents, to $17.86 after Bernstein downgraded the cable company to "market perform" from "outperform." The company announced earnings of 31 cents a share, beating estimates by one cent, on April 28. Take a look at a short strangle trade from an investor who appeared to bet that volatility could come in significantly throughout the longer-term.
More than 15,000 January 2011 17.5-20 strangles have crossed the tape thanks to an investor who likely collected $3.60 per spread. The January 17.5-strike puts (currently home to current open interest of 7,400 contracts) crossed for $2.20 per contract while the January 20-strike calls changed hands for $1.40 per contract and are home to current open interest of 35,000 contracts. This strangle sale will have a maximum profit of $3.60 if the shares finish between $17.50 and $20 at January expiration.
Thanks to the wild moves last week and today, implied volatility has been on the rise. The implied volatility of this strangle is 38%. That compares with a six month realized volatility of just 26%. If implied volatility declines and the stock stays right in this area, the strangle will decline, and the investor could decide to buy back the strangle and lock in profits.
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."