Trade of the Day: Italy (EWI) December $21/$18 strangles

The Trade:
A trader set up the long strangle for 2,000 contracts with the December $21 calls and $18 puts for a $2.40 debit.

Trade of the Day: Best Buy May $31/$29 short strangle

The Trade

A trader sold 1,500 May $31 calls at $0.89 and sold 1,500 May $29 puts at $0.64 for a credit of $1.53 or $229,500.

Trade of the Day: Ensco May $60/$55 strangles 5,000x

The Trade

A trader bought 5,000 May $60 calls at $2.35 and bought 5,000 May $55 puts at $1.90 for a debit of $4.25 or $2,125,000.

Risk/Reward

As you can see from the graph above, the spread has limited risk and unlimited profit potential in both directions. The max risk is the debit. The two break even underlying stock levels are $50.75 and $64.25. The spread profits if the underlying stock price is below $50.75 or higher than $64.25 by May expiration. The long strangle profits from a large move in the underlying and an increase in implied volatility. Since the spread is done for a debit, the passage of time hurts the spread.

The lines shown are the two break even prices at expiration. The 52-week range for ESV is a low of $33.33 and a high of $58.78. ESV traded 15,043 contracts today compared to average daily volume of 5,745.

Ensco is a global offshore contract drilling company. The Company's business operates in four segments: Deepwater, Asia Pacific, Europe and Africa and North and South America.

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: JCP March 36/37 short strangle

The Trade

Per a reader's request, the trade of the day is a short strangle in JCP. A trader sold 173 March $37 calls at $1.07 and sold 173 March $37 puts at $1.53 for a credit of $2.60 or $44,980.

Risk/Reward

As you can see from the graph above, the strangle has limited profit potential, and unlimited risk in either direction. The maximum profit potential is the credit of $44,980. The lower and upper break even underlying prices at expiration are $33.40 and $39.60. Knowing the characteristics of short strangles, the passage of time helps, a large move in the underlying hurts, and an increase in volatility hurts.

The 52-week range for JCP is a low of $19.42 and a high of $37.48. J.C. Penney Company, Inc. reports earnings tomorrow before the opening. JCP traded 16,790 contracts today compared to average volume of 12,790. According to Google Finance, JCP has a higher Price-to-sales ratio of 0.49 compared to competitors SHLD and M. SHLD reported earnings before the open today and shares have dropped 5.54%.

Trade: XLF May $15/$19 long strangle

The Trade

A trader bought 98,889 May $15 puts at $0.19 and bought 91,080 May $19 calls at $0.13 for a debit of $0.32 or $3,062,931. The spread is long delta, and therefore, has a slight bullish bias.

Risk/Reward

As you can see from the risk/reward graph above, the long strangle has limited risk and unlimited profit potential. The max risk for the strangle is the debit. The lower and upper break even underlying price levels are $14.69 and $19.34. Knowing the characteristics of a long strangle, a large move in the underlying helps, an increase in volatility helps, and the passage of time hurts. Long strangles are very risky because in order to be profitable, they need a large move in the underlying.

The lines shown in the chart above are the lower and upper break even underlying prices. At May expiration, if the underlying is in the range shown above, the spread will be profitable. The 52-week range for XLF is a low of 13.29 and a high of 17.15.

The XLF seeks to provide investment results that correspond to the price and yield performance of the Financial Select Sector of the S&P 500 Index. The Index includes companies from the financial services, insurance, commercial banks, real estate investment trusts, consumer finance, and real estate management and development.

XLF traded 377,404 contracts today compared to average daily volume of 271,410. The top ten XLF components include JPM, WFC, BAC, GS, MS, BK, USB, AXP, MET, TRV.

*Hat tip to MEB Options for pointing this out to us!