Tuesday, April 5, 2011

Trade of the Day: Microsoft Jan '12 $30/$25 bear risk reversal

The Trade
A trader sold 13,000 Jan '12 $30 calls at $0.63 and bought 13,000 Jan '12 $25 puts at $2 for a debit of $1.37 or $1,781,000.

As you can see from the graph above, the spread has unlimited risk. The spread's profit potential is limited and profits from a decrease in the price of the underlying. The break even underlying stock level is $23.63. The trader sold the calls to partially finance the purchase of the puts. MSFT closed today at $25.78.

The line shown is the break even price level. The 52-week range is a low of $22.73 and a high of $31.58. MSFT last traded below the break even price level in September 2010. MSFT traded 196,959 contracts today compared to average daily volume of 165,743. MSFT will report earnings after the close on April 28th, 2011. A dividend is projected on May 15th, 2011.

Microsoft has a lower P/E ratio, Price-to-book ratio, Price-to-sales ratio and Market cap compared to Apple.

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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