Monday, April 18, 2011

Trade of the Day: Morgan Stanley 3 way July bull vertical risk reversal

The Trade
A trader sold 2,500 July $24 puts at $0.61, bought 2,500 July $27 calls at $1.14, and sold 2,500 July $30 calls at $0.28 for a debit of $0.25 or $62,500.

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 stock price is $27.25. Therefore, the spread profits if the underlying at expiration is above $27.25. The spread's max profit potential is capped at an underlying price of $30 because of the short July $30 call. MS closed today at $26.55

The line shown above is the break even price. The chart is the Morgan Stanley daily stock chart. It's interesting to note that MS is currently trading at the 200 day moving average. The trader may look for this level to be support for MS. Shares are currently at 4 month lows after seeing earnings reports from Citigroup, Bank of America, and JP Morgan. Goldman Sachs reports tomorrow before the open.

Morgan Stanley traded 30,944 contracts today compared to daily average volume of 24,696. Morgan Stanley will report earnings on April 21st.

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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