Thursday, April 14, 2011

Trade of the Day: Cisco 3 way June bull vertical risk reversal

The Trade
A trader sold 15,000 June $16 puts at $0.34, bought 15,000 June $18 calls at $0.47, and sold 15,000 June $20 calls at $0.12 for a debit of $0.01 or $15,000.

As you can see from the graph above, the spread profits from an increase in the underlying stock before expiration. The max risk is unlimited to zero. The break even underlying price is $18.01. The spread profits if the underlying at expiration is above $18.01. The spread's max profit is capped at an underlying price of $20 due to being short the $20 call. CSCO closed today at $17.17.

The line shown above is the break even price. The chart shown is the Cisco daily stock chart. It's interesting to note that the break even price of $18.01 has shown to be a strong support level, but now could potentially be strong resistance on the way back up. The trader may be looking for a gap fill, or even an attempt to fill the last gap by June expiration. If this is the case, the trader's price target would be around $21.50.

Cisco traded 228,625 contracts today compared to daily average volume of 233,687. Cisco will report earnings on May 11th.

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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