Hewlett's Moment Of Truth

On Friday's edition of "Options Action," we did something that we rarely do: recommended buying options, or more specifically, buying the Hewlett-PackardJune 35 straddle for $3.50.

The straddle is a hard trade to make money on.

It's essentially a non-directional bet that pays off with a big up, or down move for the underlying stock, but unless the stock makes that monster move you lose. In the case of the HPQ straddle, which O/A star Dan Nathanpushed, you would need the stock to trade below $31.50, or above $38.50 to breakeven.

So given the low odds, why buy the straddle?

There are two obvious catalysts for the stock in the short-term: earnings after the bell tonight, and company's analysts meeting on June 17th, which falls just days shy of expiration. Currently, options prices are implying a 5% move after the bell tonight, which would fall short of the 6.5% move the stock has averaged in the last four quarters. In other words, opportunity could be knocking for those brave enough to roll the dice. "The moves seems to be priced very cheaply when you consider you have 2 events that could move the stock at the beginning and the end of the front month," said Nathan.

Option volume on the name today has been decidedly mixed, with traders making bullish bets by selling the June 35 puts while also making bearish bets by selling the June 37.5 Calls.

Read Jim Goldman's blog On HP -- HP Ready to Rumble?

Questions, comments send them to us at: optionsaction@cnbc.com

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  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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