Tuesday, April 26, 2011

Trade of the Day: TLT May $94/$97 1x2 ratio spread

The Trade
A trader sold 10,000 May $97 calls at $0.13 and bought 5,000 May $94 calls at $0.68 for a debit of $0.42 or $210,000.

As you can see from the graph above, the spread profits from an increase in the underlying stock. Since the spread is short more calls than long, its risk is unlimited to the upside. The spread's max profit occurs at an underlying stock price of $97 at expiration. The max profit at this price level is $1,290,000. TLT closed today at $93.85. The break even price level for this ratio spread is $94.42. Possibly related to this spread is a purchase of 5,000 May $89 puts for additional protection.

The white line shown is the break even price. The blue line is the 200-day moving average. Looking at the daily stock chart, it's interesting to note that $97 is above the 200-day moving average, which is the max profit level. TLT last traded above the break even price level on March 16th.

TLT traded 57,276 contracts compared to daily average volume of 31,964. The 52-week range is a low of $88.14 and a high of $109.34.

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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