A trader is presented with two similar trades: Trade one is a bullish at-the-money (ATM) call with 95 days until expiration for $1.80. Trade two is a bullish ATM call with 38 days until expiration for $1.30. Which trade would you choose? It seems like a somewhat simple answer. Trade two has almost a third of the expiration time, yet costs only two thirds as much as trade one does. This is the scenario traders are presented with in Expedia ( EXPE). EXPE activity is exactly the type of catalyst that can cause a near-term option to become overpriced relative to its back-month counterparts.

Volatility is elevated due to the publicized turmoil with one of its formerly major airline partners, namely American ( AMR). This is a much bigger problem than many may realize. In many ways, the airlines are an industry of lemmings. Where one goes, they all go. If American does angle into a better deal, expect the other airlines to follow suit. There is speculation that this travel site might be a good fit for one of the bigger internet companies now that M&A activity is picking up. And to add to the volatility mix, EXPE is expected to report earnings on February 10 before the market opens.

The options themselves are quite illiquid. This is a case where a lot of people know the website and its services, but not that many options traders in the product. While this stock is not a 'trade-by- appointment' security, I certainly wouldn't classify it as an active stock. Those that are making markets in EXPE must only see one-sided paper, in what little paper has traded in February, because relative to January and April, February is expensive. This could be the motivation behind the trader that bought over 13,000 of the April 25 calls electronically.

These call buys did increase April implied volatility, but not to the point where the April is a worse trade than February. If you look at this by direction only, April seems to be the more favorable purchase. Even within April there are cheaper and more expensive options. The activity on the 25 strike has caused it to be expensive relative to the 26 and 27 calls. I like what the trader is trying to do, but at this point I want to buy the 26s over the 27s. If I wanted to get really exotic, I might buy April 26 calls and sell February 27 calls.

Trade: With EXPE trading $25.90, buy to open EXPE April 26 calls for $1.80, or better.

At the time of publication, Mark Sebastian held no positions in the stocks or issues mentioned.

Mark Sebastian is COO and Director of Education for Option Pit Option Mentoring. Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the Director of Risk for a private hedge fund. He started the popular blog Option911, which is now the Option Pit blog. Sebastian has been published nationally on Yahoo! Finance, is a featured contributor for TheStreet's OptionsProfits, SFO, OptionsZone and is the managing editor for Expiring Monthly: The Option Traders Journal. Mark has a Bachelor's in Science from Villanova University.

OptionsProfits For actionable options trade ideas from a team of experts, visit TheStreet's OptionsProfits now.
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