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.

Risk/Reward:

Trade of the Day: Morgan Stanley 3 way July bull vertical risk reversal

The Trade

A trader sold 2,500 July $24 puts at $0.61, bought 2,500 July $27 calls at $1.14, and sold 2,500 July $30 calls at $0.28 for a debit of $0.25 or $62,500.

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.

Risk/Reward

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.

Trade of the Day: PNC Financial April $60/$57.50 bull reversals 2,000x

The Trade

A trader sold 2,000 April $57.50 puts at $0.65 and bought 2,000 April $60 calls at $1.93 for a debit of $1.28 or $256,000.

Risk/Reward

As you can see from the graph above, the bull reversal has unlimited risk to zero and unlimited profit potential. The max risk is being put the stock if the underlying is trading below $52.50 before April expiration. The trader sold the puts to partially finance the purchase of the calls. The break even price level at April expiration is $61.28. PNC closed today at $61.27.

The line shown is the break even price level. The 52-week range is a low of $49.43 and a high of $70.45. PNC traded 8,630 contracts today compared to average daily volume of 7,209. PNC will report earnings on April 21st and its dividend is expected on April 12th.

The PNC Financial Services Group, Inc. is a diversified financial service company. The Company is engaged in retail banking, corporate and institutional banking, asset management, residential mortgage banking and global investment servicing, providing many of its products and services nationally and others in its primary geographic markets.

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.

Options 101: The Bull Call Spread

The bull call spread is a bullish strategy used by traders who want to capitalize on an increase in the price of the underlying stock. The bull vertical consists of buying a lower strike call and selling a higher strike call. The call options will have the same expiration. The total cost of the spread is the debit, or premium paid, which is the max risk. The max profit potential is the difference between the strike prices minus the debit.

read more after the jump:

Trade of the Day: Leap Wireless bull vertical risk reversal

The Trade

A trader sold 7,500 Jan '12 $12.50 puts at $1.70 to finance the $15/20 call spread 7,500x at $1.45 for a net credit of $0.25 or $187,500. The trader bought 7,500 of the Jan '12 $15 calls at $2.10 and sold 7,500 of the Jan '12 $20 calls at $0.65.

Risk/Reward

As you can see from the graph above, the bull vertical risk reversal has limited risk to zero and limited profit potential. Since the spread is naked short puts, the max risk is being put the stock if the underlying is trading below $12.50 before Jan '12 expiration. The max profit potential occurs at an underlying stock price of $20 at expiration. Since this spread is done for a net credit, the trader keeps the credit if the underlying trades above $12.25 at expiration.

The line shown is the lower break even price level. The 52-week range is a low of $9.51 and a high of $19.11. LEAP traded 33,072 contracts today compared to average daily volume of 2,049.

Leap Wireless International, Inc. is a wireless communications carrier that offers digital wireless services in the United States under the Cricket brand. Its Cricket service offerings provide customers with unlimited wireless services for a flat rate without requiring a fixed-term contract or a credit check. LEAP closed today +1.91 or 15.73% following the AT&T/T-Mobile deal.

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.

Trade of the Day: SanDisk Corporation July $45/60 bear call spread

The Trade

A trader sold 2,000 July $45 calls at $6.40 and bought 2,000 July $60 calls $1.32 for a credit of $5.08 or $1,016,000.

Risk/Reward

As you can see from the graph above, the spread profits from a decrease in the underlying stock at expiration. The bear call spread has limited risk and limited profit potential at expiration. The max risk is $1,984,000, which would occur at an underlying price of $60 or more at expiration. The max profit potential is the credit, which would occur at an underlying price of $45 or less at expiration. The break even underlying price at expiration is $50.08.

The line shown is the upper break even price at expiration. The 52-week range for SNKD is a low of $31.82 and a high of $53.60. SNDK traded 39,388 contracts today compared to average volume of 27,749.

SanDisk Corporation is engaged in designing, developing and manufacturing data storage solutions in a range of form factors using the flash memory, controller and firmware technologies. The solutions include removable cards, embedded products, universal serial bus drives, digital media players, wafers and components. Today, SanDisk announced the release of the world's largest CompactFlash Card. The 128GB SanDisk Extreme Pro CompactFlash will be available in the first quarter of this year, and costs $1,499.

Trade Idea: Long DVN (Devon Energy Corp)

DVN could be breaking out here and on its way to $100.  There are a lot of option trades you could put on.  Let me suggest a couple:

Conservative Idea: The buy write (long stock and short the 95 or 100 call. There is a .16 divided on 3/11/11 (according to LiveVolPro) Or you can do the the Synthetic buy write by shorting a put.

More Aggressive: Bull vertical risk reversal: Long the April 95/100 for 1.42ish and sell the April 85 put for 1.60ish.  Gets you long about 5% lower and gives you a shot for $5 if DVN does rip to $100

If you have any questions please feel free to ask in the comments section.

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.

Option Flow Recap Feb 22

Macro / Thematic

SPY - 5,000 April 130 / 122 put spreads bought for $1.33

EEM - March 43 / 38 puts spread traded was bought 30,000x for $0.93

XLI – 9200 April 37 puts were bought for $1.15.

IWM – 10,000 March 81 puts were sold at $1.96.

Consumer

SVU – 17,000 of the March 8 puts were sold at $0.15.

TGT – 10,000 of the March 52.5 puts were sold at $2.06

COST – 18,000 March / July 70 put spreads were bought for $1.66. It appears to be an investor rolling out a hedge to July.

ORLY – 5000 of the March 55 puts were sold at $1.15 to open.

Energy

HERO – 10,000 January 2.5 puts were bought for $0.25

LNG - 4000 June 13.0 Calls were bought for $0.70 to open.

MRO – 10,000 April 43 / 50 call spread appeared to be sold 10,000x

Industrials / Materials

GR – 4000 March 90 calls appear to have been bought for $0.75. This comes a week after the company announced plans to increase its stock repurchase plan to $1.1 billion from $500 million.

IP – 6300 March 27 puts were bobught for $0.75 to open.

IVN – 2000 September 21 puts were sold at $ 1.05 to open

Tech

HPQ – 2500 March 48 / 45 1x2 put ratio spread was bought for $0.43. It appears to be a short term hedge going into earnings.

CVC - 20,000 June 38 / 42 call spreads appeared to be bought for 1.80. It appears to be an investor rolling an overwrite to a higher strike.

T – 1000 January’13 25 / 35 call spreads were bought for $3.32.

Financials

BAC – 5,000 March 13 synthectic shorts went off for10,000 April 13 puts were bought via a multi exchange sweep for $0.29.  

BX – 4800 January’12 15 calls were sold at $3.40

Healthcare

CLDA – Following the news that FRX is buying the company for $30. An investor bought the June 31 /30 puts spread for $0.725, 10,500x.

*Special thanks to Flotilla Partners, Option Radar, BMO Capital, MEB Options, LiveVolPro, CBOE, Option Monster, 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.

Trade of the Day: C January '12 bull vertical risk reversal

The Trade

A trader bought 40,000 Jan '12 $5 calls at $0.58, sold 40,000 Jan '12 $5.50 calls at $0.37, and sold 40,000 Jan '12 $4 puts at $0.23 for a credit of $0.02 or $80,000.

Risk/Reward

As you can see from the graph above, the bull vertical risk reversal is basically a bull vertical call spread that is partially financed by selling the $4 puts. Since we are naked long the puts, our max risk is being put the stock if the underlying drops below $4. The max risk is $15,920,000 if the stock goes to zero. The max gain would occur at or above an underlying price of $5.5 where the spread would be worth $2,080,000. Above an underlying price of $5.5, both the long and short calls would be in the money, therefore, limiting the profit potential. The break even price of the underlying is $3.98.

The line shown in the chart above is the underlying break even price. The 52-week range for C is a low of $3.34 and a high of $5.15. Citigroup traded 636,255 contracts today compared to an average of 813,793.

Trade of the Day: AAPL March $335/$340 put bull vertical

The trade

A trader sold 4,000 March $340 puts at $2.22 and bought 4,000 March $335 puts at $1.72 for a credit of $0.50 or $200,000.

Risk/Reward

As you can see from the graph above, the bull vertical has limited risk and limited profit potential. The max risk of the bull vertical is $1,800,000. The max gain is the credit received. The break even underlying price level is $339.50.

The line shown in the chart above is the break even underlying price of $339.50. The bull vertical is profitable as long as the underlying price is above the break even. The 52-week range for AAPL is a low of $195.71 and a high of $364.90. AAPL has a higher P/E ratio, Price-to-book ratio, and Price-to-sales ration than it's competitors HPQ, MSFT, and DELL.

AAPL traded 561,023 contracts today compared to average volume of 301,564.

Trade of the Day: EPD March $44/$40 bull risk reversal trades 3,800x

The Trade

A trader sold 3,800 March $40 puts at $0.20 and bought 3,800 March $44 calls at $0.60 for a debit of $0.40 or $152,000.

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 380,000 shares of stock if the underlying stock is trading below $40. At the close, the underlying ended the day at $42.69. The upper break even price level for this spread is $44.40. At this price level, the long calls would get exercised which would exactly offset the debit. The maximum profit potential is unlimited because we are naked long calls.

The line shown in the chart above is the upper break even price of $44.40. The 52-week range for EPD is a low $29.05 and a high of $43.35. Therefore, EPD must make new highs in order for this bull risk reversal to be profitable. We can see that the $44 level has shown resistance twice in the past 6 months. EPD will report 2010 Q4 earnings before the open on February 17th, 2011.

EPD is a North American midstream energy company that provides services to producers and consumers of natural gas, natural gas liquids, cruide oil, refined products and certain petrochemicals. EPD traded 11,077 contracts today with an average volume of 2,895.

Trade of the Day: C June 5.5/6 bull vertical

The Trade
Today, a trader bought 125,000 June 5.5 calls @ 0.16 and sold 125,000 June 6 calls @ .07 for a net debit of .09 or $1,125,000.

Risk/Reward

As you can see from the risk/reward graph above, the bull vertical has limited risk and limited profit potential. The maximum loss for this spread is the debit. The max profit for this bull vertical would be $5,125,000. The break even price level in the underlying stock is 5.59, which is the long call strike plus the debit.

Citigroup's 52-week high is $5.15. Therefore, for this bull vertical to be profitable, Citigroup would have to make new highs. I would describe the buyer of this spread to be very ambitious because as we can see from the chart above, the $5 level has proven to be a strong resistance level. It is important to remember that most mutual funds cannot own stocks under $5. Therefore, if C can hold above $5 for a week or more, mutual funds might take long term positions in the name.

Alternative Trade

The June 5-6-7 long butterfly for a debit of 0.18 (taking liquidity at the close today).

As you can see, this trade breaks even between $5.15 and $6.85. Although the debit is twice as much as the "Trade of the Day" the break even is .44 lower. The butterfly is also short vega, theta, and gamma. If C does move to $6 being short vega and theta will most likely be a positive. The down side to the the butterfly is the short gamma but only if C runs quickly though $7 without looking back. The butterfly should therefore be unwound when C is trading at or near $6.

Feel free to comment if you have any questions.