Friday, July 22, 2011

Trade of the Day: Brocade (BRCD) Sep $6 Straddle

The Trade
A trader sold the September $6 straddle, 3,500x at $0.82, or a $287,000 credit.

The trader is making a very risky bet on Brocade. Brocade reports earnings on August 17th. It's interesting to note that Brocade closed at $5.99, almost exactly at the strike prices of the options used. The trader's risk is unlimited, and the max profit potential is the credit. At expiration, the spread profits if the underlying is between $5.18 and $6.82.

The white lines shown in the daily chart are the break even prices at expiration. You can see that the upper break even price will be a strong resistance level, and the lower break even hasn't been touched in 2011. Brocade traded 25,756 option contracts compared to average daily volume of 15,234. The 52-week range is a low of $4.64 and a high of $7.30.

Alternative trade
To define the risk, an alternative trade could have set up the iron fly. In addition to selling the straddle, the trader could have bought the September $7 call and $5 put for a total of $0.18. It seems like a cheap way to define your risk, especially since BRCD reports earnings on August 17th.

*Special thanks to Option Radar, BMO Capital, MEB Options, Bloomberg, Reuters, Optionistics, LiveVolPro, CBOE, AMEX, Option Monster, T.O.P. group, and all of the options desks and traders we work with to provide the option flow!

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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