Wednesday, February 23, 2011

Trade of the Day: C Sep Bull Vertical Risk Reversal

The Trade
A trader bought 9,141 September $4.5 calls at $0.57, sold 9,141 September $5 calls at $0.32 at $0.32, and sold 9,141 September $4.5 puts at $0.37 for a credit of $0.12 or $109,692.

The trade is a call bull vertical that is executed for a $0.12 credit by selling the $4.5 September put. As you can see from the graph above, the risk reversal is bullish. The maximum risk is being put the stock if the underlying is below $4.5 at expiration. The maximum profit potential is capped at an underlying price of $5 and above at expiration. At this price level and above, both short options expire worthless, and the long calls get exercised. Above $5, the max profit for the spread would be $566,742. The break even underlying price level at expiration is $4.38.

The line shown is the lower break even price.

Citigroup traded 1,378,563 contracts today compared to an average of 828,435.

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