Monday, March 28, 2011

Trade of the Day: Ensco May $60/$55 strangles 5,000x

The Trade
A trader bought 5,000 May $60 calls at $2.35 and bought 5,000 May $55 puts at $1.90 for a debit of $4.25 or $2,125,000.

As you can see from the graph above, the spread has limited risk and unlimited profit potential in both directions. The max risk is the debit. The two break even underlying stock levels are $50.75 and $64.25. The spread profits if the underlying stock price is below $50.75 or higher than $64.25 by May expiration. The long strangle profits from a large move in the underlying and an increase in implied volatility. Since the spread is done for a debit, the passage of time hurts the spread.

The lines shown are the two break even prices at expiration. The 52-week range for ESV is a low of $33.33 and a high of $58.78. ESV traded 15,043 contracts today compared to average daily volume of 5,745.

Ensco is a global offshore contract drilling company. The Company's business operates in four segments: Deepwater, Asia Pacific, Europe and Africa and North and South America.

No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

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