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) 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).

In premarket trading, STT stock is up 7 cents to $47.27 a share.

STT shares have nearly tripled since reaching a 52-week low of $14.89 on Jan. 20. STT earnings are not due out until July 21 before the market opens. This will be after July options have expired. Investors should not run right out and sell their shares of STT, but it is interesting to note that at least one investor could be betting that these shares are overbought and could give back some of their gains during the next month or rocket through $53.50, but not slowly drift higher.

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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."

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