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Vale Draws Big Straddle Bet

At least one investor made a big bet that the stock will see increased volatility in the coming weeks.
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NEW YORK (TheStreet) -- Shares of Vale (VALE) - Get Report are relatively unchanged on the day Friday, but options action during afternoon trading suggest at least one investor could be betting that the minimal moves will turn into big moves throughout the near term.

VALE gained 12 cents to $26.76 during afternoon trading. Earlier during today's session, the stock was trading down more than 1% without any company-specific news on the wires.

The July 27 line was active during the afternoon session thanks to an investor who appeared to have committed a hefty amount of capital to bet on increased volatility during the next month.

By 3:30 p.m. EST, roughly 6,500 July 27 calls and the same-strike puts had changed hands. The calls were home to current open interest of 2,200 contracts while the puts were home to 1,100 contracts, indicating the majority of this volume was likely initiated to open.

The 27-strike calls changed hands for $1.35, the ask price at the time of the trade, while the 27-strike puts crossed the tape for $1.61 per contract, also the ask price when the volume hit the tape.

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This options action suggests at least one investor paid $2.96 per straddle to bet that VALE shares will be trading lower than $24.04 or higher than $29.96 at July options expiration.

If the stock is trading below the lower-breakeven at expiration, the straddle buyer will make money as the stock moves closer to zero (maximum gain to the downside is $24.04 in the unlikely event that VALE is trading at zero at July options expiration). To the upside, maximum gain is theoretically unlimited if the stock is trading above the upper-breakeven.

Implied volatility of the July 27 calls and puts is roughly 43% compared to the stock's 30-day historical volatility of 59%.

-- Written by Jud Pyle in Chicago

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."