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: Wyndman Worldwide short August $32 straddle

The Trade
A trader sold 4,000 August $32 straddles at $3.45 which was tied to 100,000 shares of stock.

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.

Trade of the Day: Coinstar Straddle Sale

An interesting trade today in Coinstar, ticker CSTR. A trader sold April $42 straddles @ $5.15 2700x with the stock at $42.67. The trader sold an IV of approximately 51.5% and is counting on CSTR not moving more than $5.15 between now and expiration. A curious conclusion (IMO) given that the stock has recently experienced some serious volatility!

Trade of the Day: Short 5,000 Citigroup Inc Jan 13 5.5 straddles

Today one strategist sold 5k Jan 13 5.5 straddles for $1.95. (*Note there is some debate weather the trader went synthetically short or shorted the straddle but for education purposes lets assume they sold the straddle.)

Max risk is unlimited, max gain is the credit of $1.95 per spread or $975,000. The spread is short vega (volatility), short gamma, long deltas (right now), and the passage of time helps.

Lets take a look at the risk reward:

This trade is very interesting to me because this trader doesn't lose money between 3.55 & 7.45! Plus he is short volatility which has been on the high side post crisis and ought to come down to the mid 20's unless the economy has an outside shock or double dips (which is always possible). Below is a chart that shows the profitability zone:

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: Texas Instruments Inc. October $36 short straddle

The Trade

A trader sold 2,500 October $36 calls at $2.97 and sold 2,500 October $36 puts at $3.10 for a credit of $6.07 or $1,517,500.

Risk/Reward

As you can see from the graph above, the spread has unlimited risk in both directions. Its profit potential is limited to the credit. The spread profits from a small move in the price of the underlying at expiration. An increase in volatility hurts and the passage of time helps. The lower and upper break even underlying prices at expiration are $29.93 and $42.07. The break even prices are the strike price plus and minus the credit.

The lines shown are the lower and upper break even underlying prices at expiration. The 52-week range for TXN is a low of $22.65 and a high of $36.55. The last time TXN traded below $29.93 was November 2011.

Texas Instruments Inc. is engaged in the designing and making of semiconductors that it sells to electronics designers and manufacturers worldwide. TI also sells calculators and related products. TXN traded 28,486 contracts today vs. an average volume of 12,640.