Tuesday, February 15, 2011

Trade: XLF May $15/$19 long strangle

The Trade
A trader bought 98,889 May $15 puts at $0.19 and bought 91,080 May $19 calls at $0.13 for a debit of $0.32 or $3,062,931. The spread is long delta, and therefore, has a slight bullish bias.

As you can see from the risk/reward graph above, the long strangle has limited risk and unlimited profit potential. The max risk for the strangle is the debit. The lower and upper break even underlying price levels are $14.69 and $19.34. Knowing the characteristics of a long strangle, a large move in the underlying helps, an increase in volatility helps, and the passage of time hurts. Long strangles are very risky because in order to be profitable, they need a large move in the underlying.

The lines shown in the chart above are the lower and upper break even underlying prices. At May expiration, if the underlying is in the range shown above, the spread will be profitable. The 52-week range for XLF is a low of 13.29 and a high of 17.15.

The XLF seeks to provide investment results that correspond to the price and yield performance of the Financial Select Sector of the S&P 500 Index. The Index includes companies from the financial services, insurance, commercial banks, real estate investment trusts, consumer finance, and real estate management and development.

XLF traded 377,404 contracts today compared to average daily volume of 271,410. The top ten XLF components include JPM, WFC, BAC, GS, MS, BK, USB, AXP, MET, TRV.

*Hat tip to MEB Options for pointing this out to us!

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