Trade of the Day: 2,000 January $25/$15 bull risk reversals in EXPE

The Trade

A trader sold 2,000 Jan '12 $15 puts at $0.65 and bought 2,000 Jan '12 $25 calls at $1.50 for a debit of $0.85 or $170,000.

Risk/Reward

As you can see from the risk/reward graph above, the bull reversal profits from an increase in the underlying stock. The maximum risk is being put 200,000 shares of stock if the underlying stock is trading below $15. The maximum profit potential is unlimited because we are naked long calls. The upper break even price level is $25.85. At this price level, the long calls would get exercised which would exactly offset the debit to put on the position.

The line shown in the chart above is the upper break even price of $25.85. The 52-week range for EXPE is a low of $18.30 and a high of $29.85. EXPE released Q4 2010 earnings on February 10, 2011. Expedia Inc.'s fourth quarter earnings missed which resulted in a 12.65% decrease in shares prices in after-market trading on February 11, 2011.

Another big trade this morning included a trader selling 4,000 July $17 puts and buying the July $22/$27 ratio call spread for 2,000x4,000. As of 1:00 PM EST, EXPE has traded 30,070 contracts with an average volume of 7,769.

EXPE is the 3rd largest public travel company with a 6.15B market cap. CTRP and PCLN are the two larger companies and trade at significantly higher P/E ratios.

*Hat Tip to @OptionRadar for pointing this trade out to us!