Mega-Cap Active Options Update: Short Straddles Trading in Dell (DELL)

With earnings (and a subsequent pullback to technical support) out of the way, Dell (DELL) investors are expecting limited movement in the stock through January expiration. Today, the January 14 straddle has been in focus, with traders selling this strategy during late-morning trading.

Both the January 14 call and January 14 put have seen more than 8,000 contracts change hands today, versus respective open interest of 4,654 and 7,690. With DELL sitting at $14.40 (up eight cents today), the call is slightly in-the-money while the put is slightly out-of-the-money.

At 10:16 AM Eastern Time, blocks of 4,000 January 14 calls and puts hit the tape, with the call trading for 93 cents and the put trading for 54 cents. At 11:00 AM Eastern, additional blocks of 4,000 change hands on the call and the put, the call trading for 91 cents and the put trading for 56 cents. The average price of the straddle overall, with 8,000 contracts trading on each side, was $1.47 per straddle. Because three of the four legs traded off the bid price, it is very likely that these straddles were sold to open.

Short straddles are typically employed by rather advanced traders who expect limited volatility in the underlying stock. Maximum profit (limited to the net credit of $1.47) is only achieved if DELL is trading exactly at 14 at expiration. That’s a drop of 40 cents, or about 2.7%, from current levels. Breakeven for this trade is $12.53 to the downside and $15.47 to the upside.

Here’s the rub when it comes to short straddles … losses are theoretically unlimited if the stock rallies, and as much as $12.53 to the downside if the stock plunges. Sellers of short straddles should be very confident in the underlying’s inertia, and reliant on time decay, which will erode the value of the sold options as expiration approaches.  Ideally, both options expire worthless.

DELL’s next earnings report is due on or around February 18, weeks after these options expire.