Monday, April 25, 2011

Trade of the Day: NetApp January 2013 $55/$45 bull risk reversal

The Trade
A trader sold 5,500 January 2013 $45 puts at $5.74 and bought 5,500 January 2013 $55 calls at $8.09 for a debit of $2.35 or $1,292,500.

As you can see from the graph above, the spread has unlimited risk to zero and unlimited profit potential. The spread's break even underlying stock price at expiration is $57.35. NetApp closed today at $51.94. The bullish trader decided to sell the $45 puts in order to partially finance the purchase of the $55 calls.

The line shown above is the break even price. Looking at the daily stock chart, you can see that the underlying last traded above the break even price on February 16th. The trader is betting that NetApp will fill its gap from $55.25 to $58.20 before January 2013 expiration.

NetApp traded 29,846 contracts today compared to average daily volume of 29,846. The 52-week range is a low of $30 and a high of $61.02. NetApp will report quarterly earnings on May 25th.

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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