Posts Tagged ‘Risk Reversal’
Monday, January 31st, 2011
No, that title’s not a misprint and you don’t have déjà vu. Japanese automaker Toyota Motor (NYSE:TM) is under fire again because of another recall, which this time impacts 1.7 million vehicles worldwide. The culprit this time is a fairly broad one – “defective parts” – including but not limited to leaky fuel systems.
In the U.S., the recall is expected to impact about a quarter-million Lexus vehicles. The majority of the impacted autos were sold in Japan. This latest recall brings the total number of Toyota vehicles recalled to more than 15 million globally since late 2009.
On the “plus” side, arguably, is the company’s transparency surrounding the latest defect. TM has been shouldered with fines of nearly $50 million due to its perceived hesitancy in reporting problems it discovers. As a result, the automaker has pledged to be more forthcoming with information. (more…)
Tags: Bull Call Spread, Risk Reversal, Synthetic Short Stock, TM, Toyota Motor
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Friday, January 21st, 2011
Today is monthly options expiration, and trading volumes tend to build in the days (and hours) leading up to the session’s close. Investors holding options have to decide whether to close their options, let them expire, or roll them to a later month.
Now is a good time to remind you of the inherent risks associated with automatic expiration. Long call options that are in-the-money at expiration – EVEN by JUST a penny or more – will automatically become that stock holding. This can be difficult for investors who a) didn’t really want to own the stock or who b) don’t have the money to buy the stock. And “difficult” can become “horrible” if the stock were, for example, to gap lower out of the gate on Monday. For a more in-depth look at this concept, check out George’s article, Automatic Exercise, After-Hours Risk, and Other Options Expiration Issues. (more…)
Tags: J.C. Penney, JCP, Options Expiration, Risk Reversal, rolling, Synthetic Short Stock
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Tuesday, January 18th, 2011
With a week-and-a-half to go before its earnings report, Yahoo! (NASDAQ:YHOO) saw what appeared to be a large risk-reversal trade cross the tape last Thursday. In early activity, a block of 30,000 April 19 calls traded for the bid price of 44 cents while a block of 30,000 April 15 puts changed hands for 40 cents (the ask price at the time). It looks like the calls were sold while the puts were bought, for a net credit of four cents per share.
This strategy is known as a risk reversal or a synthetic short stock, as the short call and long put together have a similar profit/loss profile as a short stock. Generally, risk reversals will appreciate in value if the stock declines and lose value if the underlying stock rallies. (more…)
Tags: Risk Reversal, Synthetic Short Stock, Yahoo, YHOO
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Monday, December 20th, 2010
Offshore drilling contractor Pride International, Inc. (NYSE:PDE) has been consolidating north of the 30 level for the past six weeks or so, following a sharp uptrend in September and October. Based on some unusual options activity we saw Thursday midday, it looks as though a large-scale investor is hedging his or her portfolio against short-term downside in the shares.
A four-legged trade transpired shortly before noon eastern time. Essentially, a synthetic short stock position was rolled from the front month (December) series to January. Blocks of roughly 10,400 traded at the below strikes and appear to have been executed as follows:
- December 27 puts: 10,400 sold for $0.05.
- December 30 calls: 10,400 bought for $1.175
- January 27.50 puts: 10,400 bought for $0.40
- January 30 calls: 10,400 sold for $2.05
- Net credit for this spread: 52.5 cents, or $546,000 for the lot of 10,400.
(more…)
Tags: Collar, PDE, Pride International, Risk Reversal
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Tuesday, December 14th, 2010
Bank of America (NYSE:BAC) has seen mixed reports of late, including rumors of a WikiLeaks exposure. The shares have gained more than 5.5% from Wednesday’s close but are still off more than 15% year to date. Has the stock truly begun to recover or will this be a mere hiccup as part of a longer-term downtrend? And if stock traders want to explore strategic alternatives using options, what can they consider?
For BAC bulls and bears, we have outlined two option strategies below. These write-ups are educational in nature and should not be regarded as buy or sell recommendations. All prices are as of Tuesday morning, when BAC shares were trading at $12.62, up eight cents on the day. (more…)
Tags: BAC, Bank of America, Long Call, Risk Reversal, Synthetic Short Stock
Posted in blog, Bulls Vs. Bears | No Comments »
Friday, December 10th, 2010
Microsoft (NASDAQ:MSFT) shares haven’t exactly been lighting the world on fire, down 11% in 2010 and up just 9% in the last six months. Comparatively, the Nasdaq Composite has gained 21% since mid-June. Even taking dividends into account, this is notable underperformance. An investor is hoping the stock reverses this trend, however, and reflected this view with a synthetic long stock position in the software giant.
A synthetic long stock is a snazzy way of describing a strategy that uses one long call and one short put to simulate (or synthesize) the profit/loss profile of a long stock position. The advantage to the synthetic long (versus the straight long) is the reduced capital required at the onset of the trade. (more…)
Tags: Bullish Strategies, Microsoft, MSFT, Risk Reversal, Synthetic Long Stock
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Tuesday, December 7th, 2010
Either someone’s a huge fan of Meximelts and Personal Pan Pizzas or they simply expect some intermediate-term upside in the shares of Yum! Brands (NYSE:YUM). On Monday, an options investor was active in this name, trading a bullish risk reversal (also known as a synthetic long stock). This options strategy is an alternative to buying the stock outright; it has a similar risk/reward profile but requires less capital up front to put on the trade.
Shortly before noon, blocks of 7,000 contracts traded on the April 55 call and the April 45 put. The calls traded for 95 cents apiece (the ask price at the time) while the puts traded for $1.27, which was the bid price. This suggests the puts were opened on the sell side while the calls were bought to open. With the stock trading near $50, both options were out-of-the-money by roughly the same amount. (more…)
Tags: Risk Reversal, Synthetic Long Stock, YUM, Yum Brands
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Thursday, November 11th, 2010
Research in Motion (NASDAQ:RIMM) showed pronounced strength on Wednesday amid reports that the BlackBerry company’s PlayBook tablet (designed to compete with the iPad) would be out early next year. What’s more, its price point is rumored to be below $500, which potentially makes it more attractive than the Apple (NASDAQ: AAPL) device.
The shares rallied more than 6% by yesterday’s close and are up close to 20% during the past month. RIMM is on a run toward the 60 level, but it appears that some option traders seem to be expecting a relatively sharp pullback in the intermediate term. These traders took advantage of Wednesday’s pop higher to trade a risk reversal (also known as a synthetic short stock position). (more…)
Tags: Research in Motion, RIMM, Risk Reversal, Synthetic Short Stock
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Thursday, November 4th, 2010
El Paso (NYSE:EP) shares dropped nearly 3.7% in Wednesday’s trading following its pre-open earnings report. The oil & gas company’s third-quarter results topped analysts’ expectations by a penny but were a penny shy of year-ago results.
Company President and CEO was optimistic about the results, noting “Each quarter’s progress brings us closer to our long term goals,” but investors weren’t as cheerful, sending the stock to an intraday low of $12.55 before an eventual close at $13.03. To be fair, the shares have been butting against new-annual-high territory, so it may have been due for a breather. (more…)
Tags: Delta Neutral, El Paso, EP, Risk Reversal, Synthetic Long Stock
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Thursday, October 14th, 2010
General Electric (NYSE:GE) reports earnings tomorrow before the open. GE has been a leader in the recent rally and has been a major influence on the price of the Dow Jones Industrial Average (DJIA) to the upside along with Caterpillar (NYSE:CAT). GE does not tend to be a volatile stock when compared to its Dow Jones peers. Even though GE is not an extremely volatile stock (relatively speaking) earnings reports can spur abnormal volatility.
Fundamental Analysis
GE obviously has its hands in many different pies spanning across several industries. This can make the shares hard to value, as can the sheer enormity and complexity of the company itself. (more…)
Tags: Earnings, GE, General Electric, Risk Reversal, Synthetic Stock
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