Tuesday, February 22, 2011

Trade of the Day: PCS March 12/13 1,600x2,500 call spread

The Trade
A trader bought 1,600 March $12 calls at $1.55 and sold 2,500 March $13 calls at $0.90 for a debit of $23,000.

As you can see from the graph above, the front spread has unlimited risk and limited profit potential. The downside risk is limited to the debit, but the upside risk is unlimited. At expiration, the maximum profit of $137,000 occurs at an underlying price of $13. At this price level, the long calls would be exercised and the short calls would expire worthless. It's interesting to note that at the time of execution, the $13 calls were in the money. The lower and upper break even prices for this spread at expiration are $12.14 and $14.52.

The two lines shown above are the lower and upper break even underlying prices.

MetroPCS Communications, Inc. offers wireless broadband mobile services in selected metropolitan areas in the United States over its own licensed networks or networks of entities. PCS will report quarterly earnings before the open on February 24, 2011. PCS traded 6,066 contracts compared to daily average volume of 1,075.

According to Google Finance, PCS has the highest Price-to-sales ration of 1.36 compared to competitors 0.96 for VZ, 0.92 for S, and 1.35 for T.

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