Monday, May 2, 2011

Trade of the Day: Amazon July $215/$180 bull risk reversal

The Trade
A trader sold 750 July $180 puts at $3.55 and bought 750 July $215 calls at $4.55 for a debit of $1 or 75,000.

As you can see from the graph above, the trader is making a bullish bet on Amazon. The spread has unlimited risk to zero and unlimited profit potential. The spread's break even underlying stock price at expiration is $216. AMZN closed today at $201.19. The bullish trader decided to sell the $180 puts in order to partially finance the purchase of the $215 calls.

The line shown is the break even price. Looking at the daily stock chart, you can see that in order for the spread to be profitable, AMZN would have to trade at all time highs.

AMZN traded 158,560 contracts today compared to average daily volume of 70,921. The 52-week range is a low of $105.80 and a high of $203.42. AMZN reported quarterly earnings on April 26th.

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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