Monday, January 31, 2011

Trade of the Day: EWA July 27/24 short strangle

A trader sold 3,500 EWA July 27 calls at 0.55 and sold 3,500 July 24 calls at 1.55 for a net credit of 2 or $700,000. As you can see from the risk/reward graph above, the strangle has limited upside and unlimited downside. The max profit is the credit. The strangle breaks even at an underlying price of $22 and $29. The seller of the strangle benefits from the passage of time. A large move in the underlying and an increase in implied volatility hurts the strangle.

The EWA seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate Australian market. The index increased 0.30, or 1.22%, despite the political unrest in Egypt.

The chart above shows the profitable range from the strangle of $22 to $29. The $22 level shows strong support. The $29 level would be an index high.

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