Wednesday, April 13, 2011

Trade of the Day: Best Buy May $31/$29 short strangle

The Trade
A trader sold 1,500 May $31 calls at $0.89 and sold 1,500 May $29 puts at $0.64 for a credit of $1.53 or $229,500.

As you can see from the graph above, the short strangle has unlimited risk in either direction. The max profit potential is limited to the credit. The two break even underlying stock prices at are $27.47 and $32.53. The spread profits if the underlying stock price is trading in this range at expiration. Therefore, the trader does not expect a large move in the underlying before May expiration. BBY closed today at $30.25.

The two lines shown are the break even prices. The chart above is the hourly stock chart. As you can see, the current stock price is almost exactly in between the two break even price levels. The upper break even price, $32.53, proved to be strong resistance when it last traded above that level on March 24th of this year. The 52-week range is a low of $28.09 and a high of $48.83. Best Buy will release earnings on June 14th, 2011.

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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