Monday, March 21, 2011

Trade of the Day: Leap Wireless bull vertical risk reversal

The Trade
A trader sold 7,500 Jan '12 $12.50 puts at $1.70 to finance the $15/20 call spread 7,500x at $1.45 for a net credit of $0.25 or $187,500. The trader bought 7,500 of the Jan '12 $15 calls at $2.10 and sold 7,500 of the Jan '12 $20 calls at $0.65.

As you can see from the graph above, the bull vertical risk reversal has limited risk to zero and limited profit potential. Since the spread is naked short puts, the max risk is being put the stock if the underlying is trading below $12.50 before Jan '12 expiration. The max profit potential occurs at an underlying stock price of $20 at expiration. Since this spread is done for a net credit, the trader keeps the credit if the underlying trades above $12.25 at expiration.

The line shown is the lower break even price level. The 52-week range is a low of $9.51 and a high of $19.11. LEAP traded 33,072 contracts today compared to average daily volume of 2,049.

Leap Wireless International, Inc. is a wireless communications carrier that offers digital wireless services in the United States under the Cricket brand. Its Cricket service offerings provide customers with unlimited wireless services for a flat rate without requiring a fixed-term contract or a credit check. LEAP closed today +1.91 or 15.73% following the AT&T/T-Mobile deal.

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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