Breaking Down an Anti-Volatility Play on Office Depot (ODP)

• Posted by Andrea Kramer
• on May 11th, 2011

Corporate supplies concern Office Depot $ODP has bucked the broad-market trend lower today, after FBR Capital upped its price target to $7 from $6.50 and underscored its “outperform” endorsement. According to StreetInsider.com, the brokerage firm waxed optimistic on the company’s pursuit of a new CEO, as well as changes to its board of directors. In addition, FBR lifted its 2011 per-share earnings estimate to 3 cents from a penny, and upped its 2012 estimate to 26 cents from 20 cents per share.

However, taking a look at the action in the options pits today, it appears one speculator is betting on ODP to remain range-bound over the long term. Specifically, symmetrical blocks of puts and calls traded at the security’s January 2013 4 strike — both at the bid price, suggesting they were sold. Plus, intraday volume has handily exceeded open interest on both sides of the tape, pointing to the initiation of a short straddle on the office supplier.

Since the 4-strike puts traded at the bid price of $0.85, and the 4-strike calls crossed at the bid price of $1.25, the anti-volatility play was established for a net credit of $2.10 per pair of options — which represents the maximum potential profit on the play. In fact, the speculator will reap a reward as long as ODP settles between the $1.90 level (strike minus net credit) and the $6.10 level (strike plus net credit) when the long-term options expire. On the flip side, the investor’s losses will accumulate the further the shares stray from this breakeven window.

Technically speaking, ODP is all too familiar with stagnation on the charts, with the stock idling between support in the $4 region and resistance in the $6 neighborhood for the past year. More recently, the equity’s 10-week moving average has emerged as an additional layer of resistance, rejecting the stock’s weekly advances since mid-February.

For more options-centered educational content, or to see which stocks are heating up the options pits each day, visit my home base at SchaeffersResearch.com.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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