An Option Strategy to Try for Stock-Trak

Download 2010-3-5 'Straddles' and 'Strangles' Bet on Stability – WSJ.com

NEW YORK—As the stock market continues to hum along in a relatively narrow range, options traders are betting that the stock of several companies will remain stable in coming weeks.

Traders on Thursday sold "straddles" and "strangles" in a handful of companies, includingApplied Materials Inc. and Xerox Corp., banking on limited volatility in their shares.

In Applied Materials, one trader in the session's first hour sold a strangle in the company's July contracts, selling a large batch of July $13 calls and an equally large batch of July $12 puts.

Collecting about $1.45 by selling the contracts, the trader stands to make money as long as Applied Materials shares stay between $10.55 and $14.45 until expiration on July 16.

The stock closed at $12.26, losing 1.1%.

In Xerox, a trader sold a straddle in July options, selling equal numbers of July $10 calls and July $10 puts.

The trader collected $1.50 and stands to make money as long as Xerox shares stay between $8.50 and $11.50. Closing at $9.54, down two cents, Xerox shares last dipped below $8.50 on Feb. 11.

The sale of a strangle, as well as a straddle, involves the sale of both a call and a put option.

Representing a bet on limited volatility, the trades work best if the underlying stock stays between the strike price of the call and the strike price of the put.

On Thursday, traders targeted companies that have already reported their most recent quarterly earnings, which eliminates a certain amount of uncertainty in a stock's future moves.

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