Diagonal Spread Suggests Skepticism on SLM Corporation

SLM Corporation (SLM) attracted a diagonal spread today, with the trader focusing in on the equity's November 11 call and January 2010 15 call. Around noon, two blocks totaling 2,000 contracts crossed the tape on SLM's November 11 call, with the transactions taking place closer to the bid price -- suggesting they were sold. Simultaneously, a single block of 2,000 contracts changed hands at the ask price on SLM's January 15 call, revealing that they were most likely purchased.

The typical way to proceed in this diagonal spread would be to repurchase the sold 11-strike call at expiration, or simply let them expire worthless. Then, the trader will sell another batch of 2,000 calls, this time at the January 11 strike. In this manner, the diagonal spread trader has legged into a traditional short call spread. The sale of the front-month calls has effectively lowered the cost of entering the position.

So, by opening this diagonal spread, it seems safe to assume that the trader expects SLM to remain stagnant during the near term. The equity is currently trading just north of $11, which means that those sold front-month calls are in the money by a very slim margin.

However, the speculator is likely betting that SLM will continue to be stymied by resistance at its 20-month moving average. This long-term trendline is looming directly overhead, and it hasn't been bested on a monthly closing basis since June 2007.

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