Trade of the Day: Gold (GLD) January $150/June $225 Bull Risk Reversal

The Trade

Trader sold January $150 puts at $2.35 and bought June $225 calls at $6.95 15,000x for a $4.60 debit, $6,900,000 total. Maximum risk is $231,900,000. Profit potential is unlimited.

Chart above graphs profit and loss profile for the trade. Trade is highly bullish and benefits from rise in volatility. Blue line below highlights break even at $187.49.

Alternative trade would the January $145/$150 bull put spread, buying $145 and selling $150, with the June $225/$240/$255 call butterfly. $1.05 debit for butterfly and $.60 credit for put spread, $.45 total debit. Position limits downside risk, while retaining bullish bias with a superior risk-to-reward ratio.

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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.

Trade of the Day: Qualcomm September $55/$60/$65 call butterfly spread

The Trade

Trader executed the September $55/$60/$65 call butterfly spread 5,000x for a debit of $.39, $195,000 total. Maximum risk is equal to the total debit. Profit potential is limited to $2,305,000.

Currently, the position is positive gamma as it is looking for a big move to help shares settle slightly above $55 and below $65. Moreover, passage of time, or theta, will lower the value of the spread.

The daily chart above depicts the profit zone for the spread. A retest of yearly highs near $60 is the optimal scenario.

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*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.

Trade of the Day: TLT June $96/$98/$100 Call Butterfly

The Trade
A trader bought 10,000 June $96 calls at $0.74, sold 20,000 June $98 calls at $0.36, and bought 10,000 June $100 at $0.18 for a debit of $0.20 or $200,000.

Trade of the Day: Medco Health Solutions July $60/$65/$70 butterfly

The Trade

A trader bought 24,000 July $60 calls at $2.50, sold 48,000 July $65 calls at $0.95, and bought 24,000 July $70 calls at $0.40 for a debit of $1 or $2,400,000.

Risk/Reward

As you can see from the graph above, the long butterfly has limited risk and limited profit potential. The max risk is the debit and the max profit is the difference between the strikes minus the debit, which is $4, or $9,600,000. The max profit would occur if the underlying stock pins to the middle strike price at expiration. The lower and upper break even price levels at expiration are $61 and $69.

The lines shown are the lower and upper break even price levels. MHS closed today at $56.23. MHS trade 116,641 contracts today compared to average daily volume of 5,387. The 52-week range is a low of $43.45 and a high of $66.70.

Medco Health Solutions, Inc. is a healthcare company. It provides a clinically-driven pharmacy services designed for private and public employers, health plans, labor unions and government agencies of all sizes, and for individuals served by Medicare Part D Prescription Drug Plans.

Options 101: The Butterfly

A butterfly is a spread consisting of 3 legs with exercise prices that are equally spaced apart. All options are either calls or all puts with the same expiration. The ratio is always 1x2x1. In a long butterfly, the outside options are purchased (the wings) and the inside options are sold (the guts). An important characteristic of all butterflies is the limited risk. The cost to put on a long butterfly is the debit which is the max risk. The max gain is the difference between the strike prices minus the debit. The max gain occurs if at expiration the underlying stock price pins to the exercise price of the short calls. If a long butterfly is executed for a credit, the only risk is the execution risk. A large move in the underlying generally hurts, an increase in volatility hurts, and the passage of time helps.

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.