Managing risk in Bank of New York

One investor is using options to calm the waters in Bank of New York Mellon.

Our tracking systems detected the sale of 2,853 October 23 calls for $0.65 and the purchase of an equal number of September 22 calls for $0.90. Volume was below open interest in the Septembers but not the Octobers, which indicates that an existing short position was rolled from one contract to the other.

The investor almost certainly owns shares in the iconic institution, which traces its roots to Alexander Hamilton in the late 18th century. He or she is selling calls against the stock to generate income and reduce volatility. Yesterday's transaction cost them $0.25, and gives them the right to sell BK for $1 more than previously.

Rolling short near-the-money calls lets the investor capture the greater time value in the longer-dated contracts. In return, they forfeit runaway profits if the shares rally strongly. The strategy also lets them continue to collect dividends. See our Education Section for more on how options can be used to manage risk.

BK rose 0.58 percent to $22.41 yesterday, and is up 5 percent in the last month. Shares have been working their way higher since last October, but remain in the middle of their recent trading range.

Some 6,600 contracts traded in the name yesterday, versus average turnover of fewer than 2,600.

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