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Time decay key to mid-cap strategy

David Russell (david.russell@optionmonster.com)

One investor wants to turn time into money with a highly unusual trade on mid-cap stocks.

optionMONSTER's Depth Charge monitoring system detected the purchase of about 3,000 April 184 puts on the SPDR S&P MidCap exchange-traded fund for $11.40. An equal number of April 180 puts were sold at the same time for $8.20. Volume was more than 180 times open interest in both strikes.

The position is remarkable because the MDY is trading for $173.88, down 1.88 percent on the day, which means that both of those contracts are in the money . It cost $3.20 to open and will expand to $4 if the stock remains below $180 through expiration.

Known as a vertical put spread , the strategy is normally used on out-of-the-money strikes in hope of leveraging a modest move. In today's trade, however, the investor is looking to capture the extrinsic value of in-the-money contracts and make money from the passage of time . (See our Education section)

The only way the position can lose money is if the MDY closes above $180 on expiration. That's roughly the same level where it just hit resistance, so the investor may believe that it's unlikely in the intermediate term.

Overall option volume was quadruple the daily average, with puts outnumbering calls by more than 5 to 1.

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