How to See Where Option Calendar Spreads Are Placed

09/16/2009 12:01 am EST

Focus: OPTIONS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

BB&T Corporation (BBT) appears to have been targeted yesterday by a skeptical calendar spread trader. Shortly after midday, two blocks of 150 contracts apiece changed hands on the banking issue's September 25 put and October 25 put. The front-month contracts crossed the tape closer to the bid price, suggesting they were most likely sold, while the back-month puts traded between the bid and ask prices.

BBT price chartThis strategy, known as a calendar spread, is generally employed by traders who are expecting very little movement from the underlying equity. The put options at both strikes will be closed out just before the front-month contracts expire, allowing the trader to lock in the remaining time value on the back-month contracts.

In order to reap the maximum benefits of time decay, the calendar spread strategy is best executed with at-the-money options. However, the trader in this scenario appears mildly bearish with BBT trading near $27 at the time the spread was opened. The speculator opted to use 25-strike puts, rather than 26 or 27.50.

After checking out the charts, it seems safe to say that BBT could remain range bound through the expiration of September-dated options this Friday, when this calendar spread will most likely be liquidated. Since September 1, the shares have been pinned between support near $26 and resistance from their ten- and 20-day moving averages.

By Elizabeth Harrow of Schaeffer’s Trading Floor Blog

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