Tuesday, January 5, 2010

Tempur Pedic (TPX) - Straddle Seller

TPX is up 5% today to 25.62. The LIVEVOL™ Pro Summary is included below.

The company averages ~1000 option contracts traded a day. In the first hour over 8600 have traded. The Company Tab snapshot below (click to enlarge) illustrates that the call:put ratio is 1:1. Further, the Net Premium is -$390,000 - people are selling vol.

The day's biggest trades snapshot below (click to enlarge) and the Options Tab snapshot below (click to enlarge) demonstrate that the Feb 25 straddle is getting sold @ 3.90 (1.85 in the puts, 2.05 in the calls). Note also that the OI (open interest) is well below the trade size - these are opening orders (at least in part).

A look at the Charts Tab snapshot below (click to enlarge) illustrates the IV30™ (red line) vs the HV30™ (blue line) divergence on the bottom portion. You can also see that the stock has been on an upward trend. Finally, you can see how unusual this amount of option volume is.

At Feb expiration the straddle sale wins if the stock is above 25 - 3.90 = 21.10 or below 25 + 3.90 = 28.90. A straddle seller bets that the stock goes directly to the short strike at expo - in this case 25. If not held to expiration, the straddle seller bets on decreasing volatility - in this case, a bet that the implied vol (red line) comes back down to meet the historical vol (blue line).

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