Thursday, May 26, 2011

Trade of the Day: Short October $14 puts to buy October $17/$22 call spread

Trade of the Day:
A trader sold 10,000 October $14 puts to buy 10,000 October $17/$22 call spreads.


The trader is making a large bullish bet on Yahoo. The trader sold the puts to partially finance the purchase of the bull call spreads. The whole spread is done for a $0.22 debit, or $220,000. The spread has unlimited loss to zero and limited profit potential. The max gain is limited at an underlying price of $22 and above by October expiration. The break even price for the spread is $17.22. Yahoo closed trading today at $15.98. The 52-week range for YHOO is a low of $12.94 and a high of $18.84.

The white line shown in the daily YHOO stock chart is the break even line. Yahoo has been range bound since 2009. Therefore, the trader is betting that Yahoo makes a break to the upper end of the range or possibly break out by October expiration. As recently as May 12th, YHOO was trading above the break even line.

Yahoo will report quarterly earnings on July 19th. Yahoo traded 109,624 option contracts today compared to average daily volume of 159,759.

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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