Wednesday, February 9, 2011

Trade of the Day: EPD March $44/$40 bull risk reversal trades 3,800x

The Trade
A trader sold 3,800 March $40 puts at $0.20 and bought 3,800 March $44 calls at $0.60 for a debit of $0.40 or $152,000.

As you can see from the risk/reward graph above, the bull reversal profits from an increase in the underlying stock. The maximum risk is being put 380,000 shares of stock if the underlying stock is trading below $40. At the close, the underlying ended the day at $42.69. The upper break even price level for this spread is $44.40. At this price level, the long calls would get exercised which would exactly offset the debit. The maximum profit potential is unlimited because we are naked long calls.

The line shown in the chart above is the upper break even price of $44.40. The 52-week range for EPD is a low $29.05 and a high of $43.35. Therefore, EPD must make new highs in order for this bull risk reversal to be profitable. We can see that the $44 level has shown resistance twice in the past 6 months. EPD will report 2010 Q4 earnings before the open on February 17th, 2011.

EPD is a North American midstream energy company that provides services to producers and consumers of natural gas, natural gas liquids, cruide oil, refined products and certain petrochemicals. EPD traded 11,077 contracts today with an average volume of 2,895.

No comments:

Post a Comment