Friday, February 18, 2011

Trade Idea: HPQ March 47/45 1x2 put spread

The Trade
CNBC's Options Action recommended a trade with HPQ. They recommended executing the March 1x2 for a $0.05 debit by buying 1 March $47 put and selling 2 March $45 puts.

As you can see from the graph above, the put front spread is bearish with a bias to an underlying price of $45 at expiration. The max risk is $4,305 if the stock goes to zero. The max profit potential for this spread is $195 with the HPQ at $45. At an underlying price of $45, the short puts would expire worthless, and our long puts would be exercised. The break even price of the spread is at $46.95. At expiration, if the underlying is above $47, the spread would lose only its debit as both options would expire worthless.

The line above shows the break even price level at expiration.

Hewlett-Packard Company is a provider of products, technologies, software, solutions and services to individual consumers, small and medium sized businesses. HPQ releases earnings on February 22, 2011. HPQ traded 40,820 contracts today compared to average daily volume of 41,679. The 52-week range for HPQ is a low of $37.32 and a high of $54.75.

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