Stocks quoted in this article:
Valassis Communications, Inc.
has been on a roll lately, consistently closing at new 52-week highs on the New York Stock Exchange (NYSE). The communications company closed last week at a record-setting $25.97, and this morning VCI breached the $26 level.
However, it seems at least one speculator is skeptical VCI's rise will continue in the short term, as evidenced by yesterday's opening of a short straddle on the communications concern. Late yesterday morning, three blocks totaling 3,260 March 25 calls changed hands closer to the bid price, suggesting they were sold. At the same time, a symmetrical number of blocks totaling 3,260 March 25 puts changed hands closer to the bid price, also indicating they were sold. With open interest at both strikes ballooning overnight, we can safely assume these were newly opened contracts.
By opening a short straddle, this option player is betting that VCI will remain stagnant near the $25 level through March expiration. Should the stock make a major move in either direction, the seller is at risk of assignment, and could be obligated to either deliver 100 shares per contract at the strike price of $25, or purchase 100 shares per contract at the strike price of $25 -- either of which could represent a significant loss for the speculator.
While risky, the benefit of a short straddle is that by selling two options, the speculator collects a pretty premium, which represents the most he can possibly make from this play. If VCI remains within a tight trading range during the next month, the trader should be able to dodge assignment and retain all or most of the initial premium.