Wednesday, March 2, 2011

Trade of the Day: Texas Instruments Inc. October $36 short straddle

The Trade
A trader sold 2,500 October $36 calls at $2.97 and sold 2,500 October $36 puts at $3.10 for a credit of $6.07 or $1,517,500.

As you can see from the graph above, the spread has unlimited risk in both directions. Its profit potential is limited to the credit. The spread profits from a small move in the price of the underlying at expiration. An increase in volatility hurts and the passage of time helps. The lower and upper break even underlying prices at expiration are $29.93 and $42.07. The break even prices are the strike price plus and minus the credit.

The lines shown are the lower and upper break even underlying prices at expiration. The 52-week range for TXN is a low of $22.65 and a high of $36.55. The last time TXN traded below $29.93 was November 2011.

Texas Instruments Inc. is engaged in the designing and making of semiconductors that it sells to electronics designers and manufacturers worldwide. TI also sells calculators and related products. TXN traded 28,486 contracts today vs. an average volume of 12,640.

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