Thursday, February 10, 2011

Trade of the Day: F March/May $17 calendar call spread 13,000x

The Trade
A trader sold 13,000 March $17 calls at $0.24 and bought 13,000 May $17 calls at $0.74 for a debit of $0.50 or $650,000. It's interesting to note that a trader initiated a March/May long calendar spread yesterday too.

The max risk and max profit potential for this calendar spread are both limited. The max risk for the long call calendar would be the costs to put on the spread, the debit. The maximum profit potential of this spread would occur if the underlying stock price would move directly to the strike price. Therefore, a large move in the underlying would hurt the spread, an increase in volatility would help, the passage of time would help.

At March expiration, the lower and upper break even underlying price levels are $16.80 and $17.20. At the close today, the underlying finished at $15.95. The 52-week range for F is a low of $9.75 and a high of $18.97. On February 4th, Ford reported a fourth-quarter earnings miss. If F were to reach the $16.50 level and approach the $17 max profit level before March expiration, the trader would have the option to unwind the position and take profits. Or, the trader can roll the short March calls to short April calls and keep the same spread on. Depending on the traders view, he can also roll into a butterfly or a back-spread at very favorable prices.

Ford traded 223,476 contracts today.

According to Google Finance, F had the lowest P/E ratio compared to its competitors TM, HMC, NSANY, DDAIF, and VLKAY.

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