Trade of the Day: 20 Year Treasury (TLT) long September $95 straddle

The Trade
A trader bought the September $95 straddle 5,000x at $4.55, or $2,275,000.

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.

Risk/Reward
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.

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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: EBIX

Lots of exciting action in (EBIX) Ebix, Inc. for those of you that like to live (or die) by the seat of your pants. Seemingly a negative story on SeekingAlpha.com caused the stock to plunge, which the company consequently responded to here. 

Who to believe? Only price my friends. Only price. What else matters?

Let's take a look at the gory details after the jump!

Options 101: The Straddle

The long straddle consists of a call option and a put option with the same number of units, expiration, and strike price. It is a spread that involves the simultaneously buying of a put and a call. A long straddle has unlimited profit in either direction and limited risk. The costs to put on a long straddle is the debit, or premium paid. The debit is the maximum risk. A large move in the underlying would increase the value of the straddle. The passage of time hurts and an increase in volatility helps. Long straddles are attractive because of the unlimited profit potential. However, long straddles are considered risky because a large move is needed in order for the spread to be profitable. The break even price levels for the straddle are the strike price plus and minus the debit.