International Game Technology (NYSE:IGT): An Investor Rolls the Dice on Low Volatility

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With the broad market wearing its rally cap once again (due in part to vaguely upbeat murmurings from Ben Bernanke), International Game Technology IGT shares are a definite underperformer. The stock is off nearly 1% today (at $15.01) with the Dow and the S&P 500 Index up roughly the same amount. Other than one downgrade earlier this month, news has been light around this manufacturer of slot machines and other gaming hardware.

One large-scale investor appears to have sold an at-the-money straddle on the stock today. This strategy is typically used when the investor expects little volatility from the underlying. Just before noon Eastern Time, a block of 12,500 contracts traded on both the September 15 put and call. The puts changed hands at the bid price of 40 cents while the calls traded at the bid price of 50 cents.

The total credit collected for this sold straddle was 90 cents, which is the most the investor can profit on this trade. Maximum reward occurs if IGT expires right at the 15 strike on September 17. If the stock moves dramatically, however, losses are theoretically unlimited both to the upside because of the short call and down to zero on the downside. . Breakevens for this strategy are $14.10 and $15.90; IGT has to be trading in this range when the options expire for this short straddle to be profitable.

The investor also appears to have bought 150,000 shares of IGT for $15.20 at the same time the straddle changed hands. This keeps the overall strategy delta neutral, which in the short term means it will not be impacted by changes in the stock (only by shifts in volatility). The investor is still anticipating minimal movement in the shares away from the 15 strike for the next three weeks.

Photo Credit: Sinistra Ecologia Libertà

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