Thursday, April 7, 2011

Trade of the Day: Wal-Mart May $55/$52.50 bull risk reversal

The Trade
A trader sold 8,000 May $52.50 puts at $1 and bought 8,000 May $55 calls at $0.30 for a credit of $0.70 or $560,000.

As you can see from the graph above, the spread profits from an increase in the underlying stock price. The risk reversal has unlimited risk to zero and unlimited profit potential. The break even underlying stock level is $53.40. The trader sold the puts to finance the purchase of the calls. WMT closed today at $53.

The line shown is the break even price level. The 52-week range is a low of $47.77 and a high of $57.90. WMT traded 34,043 contracts today compared to average daily volume of 37,129.

Wal-Mart's has a lower P/E ratio but a higher Price-to-sales ratio compared to it's biggest competitor, Target.

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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