Big Print in Weatherford (WFT) after an investor sold 20,000 January 2010 calls at the $25 strike against a positoin in WFT shares at $20.45, according to a contact on the exchange floor. There was heavy trading in WFT shares at the close and, taken together, the action looks like an opening buy-write.

Recall that, in a buy-write, an investor is simply selling calls against shares. In the typical trade, the trader sells 1 call for every 100 shares held. In the WFT example, the strategist was selling calls for $1 even. Since the multiplier for an options contract is 100, the sale of 1 call reduces the cost of owning WFT to $19.45 per share (excluding commissions). $19.45 becomes the downside breakeven.

The upside is also limited, however, because the strategist is short a call. In the Weatherford example, the strategist was selling the $25 strike. Therefore, if WFT is above that level at the January expiration, shares will be “called” away at $25 (+ fee for assignment–varies by broker) for a profit of $5.55 per share, or 28.5 percent. Importantly, the shares can be sold and or the call can be “bought-to-close” at any time prior to expiration.

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