DRIV – Digital River, Inc. – It looks like an investor expecting Digital River’s shares to remain range-bound through November expiration sold a strangle in the second half of the trading session. Shares of the provider of a variety of marketing solutions and services increased more than 5.50% this afternoon to touch an intraday high of $33.34. The strangle-strategist appears to have sold 2,500 calls at the November $35 strike for a premium of $1.35 each, and sold the same number of puts at the lower November $28 strike at a premium of $0.525 apiece. Gross premium pocketed on the transaction amounts to $1.875 per contract. The trader keeps the full amount of premium received on the strangle play if DRIV’s shares trade within the boundaries of the strike prices described through expiration day. The short positions in both call and put options expose the investor to potentially devastating losses in the event that shares rally above the upper breakeven price of $36.875, or should shares slip beneath the lower breakeven point at $26.125, by November expiration. Digital River is scheduled to report third-quarter earnings after the closing bell on November 3, 2010. An earnings miss or surprise could adversely impact the strangle player if the price of the underlying stock shoots up or tumbles lower. But, the erosion of time value come November, and the drop in options implied volatility that often appears post-earnings, could allow the trader to buy back the strangle at an advantageous price.
AVP – Avon Products, Inc. – Bulls are busying themselves with call options on the global manufacturer and marketer of beauty products this afternoon with the price of the underlying shares rising 3.00% to $32.44 by 1:00 pm ET. Near-term calls are popular with investors itching for Avon Products to extend gains through October expiration. Traders purchased approximately 1,800 calls at the October $33 strike for an average premium of $0.38 apiece. Call buyers make money if, by October expiration, AVP’s shares rally another 2.90% to exceed the average breakeven price of $33.38. Bullish sentiment spread to the higher October $34 strike where another 1,100 call options were purchased at an average premium of $0.18 each. Investors long the calls stand ready to profit should shares surge 5.35% to trade above the effective breakeven price of $34.18 by expiration day next month. The increase in demand for calls on Avon Products helped lift the stock’s overall reading of options implied volatility 4.7% to 28.53% in afternoon trading.