Wednesday, April 20, 2011

Trade of the Day: Alcoa June $18/$16 bull risk reversal 7,500x

The Trade

A trader sold 7,500 June $16 puts at $0.42 and bought 7,500 June $18 calls at $0.26 for a credit of $0.16 or $120,000.

As you can see from the graph above, the spread has unlimited risk to zero and unlimited profit potential. Since the spread is done for a credit, the underlying must be below $15.84 for the spread to start losing money. Alcoa closed today at $16.64. The trader is bullish in Alcoa, and decided on the risk reversal because selling the puts more than financed the purchase of the calls.

The line shown above is the break even price. Looking at the daily stock chart, you can see that the underlying bounced right off the break even price level on Monday. Therefore, the trader executed this trade betting that Alcoa will not break the $15.84 support level.

Alcoa traded 79,218 contracts today compared to average daily volume of 64,104. The 52-week range is a low of $9.81 and a high of $18.47.

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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