MSFT – Microsoft Corp. – Options traders littered the software company with long term bullish transactions with shares of the underlying stock trading 1.20% higher at $25.09 with 40 minutes remaining before the closing bell. It appears one investor initiated a lopsided bullish call butterfly spread in the January 2011 contract to position for significantly higher MSFT shares by expiration. The optimistic individual picked up 6,000 calls at the January 2011 $26 strike for a premium of $1.94 each [wing 1] and purchased another 6,000 calls at the higher January 2011 $35 strike for an average premium of $0.15 apiece [wing 2]. Finally, the trader sold 12,000 calls at the January 2011 $30 strike to receive a premium of $0.66 a-pop [body]. The net cost of the butterfly spread amounts to $0.77 per contract. Therefore, the responsible party is prepared to make money as long as Microsoft’s shares rally 6.7% over the current price of $25.09 to surpass the effective breakeven point to the upside at $26.77 by expiration day. Maximum potential profits of $3.23 per contract accumulate for the trader should MSFT’s shares surge 19.5% to $30.00 by January 2011 expiration. The investor loses the $0.77 premium paid for the transaction if shares fail to rally above $26.00. And, in most butterfly spreads this amount would represent maximum loss potential. But, in this case, the trader could lose up to a maximum of $1.77 per contract if Microsoft’s shares rally above $35.00 because of the greater distance of the upper strike price selected in the transaction. [We note that the spread is ‘lopsided’ because typically the wings of a butterfly are equidistant. However, in this case the wings are different lengths because there is no January 2011 $34 strike available, so the investor utilized the next closest, or January 2011 $35 strike price.] The investor starts to lose money above and beyond the $0.77 in premium paid for the trade if shares of the underlying stock rally above $34.00 ahead of expiration day. Other bullish investors enacted plain-vanilla debit call spreads in the longer-dated January 2012 contract. Optimists purchased a total of 7,000 calls at the January 2012 $32.5 strike for roughly 1.34 each, and sold the same number of calls at the higher January 2012 $37.5 strike for approximately $0.54 in premium per contract. The spread cost investors an average net premium of $0.80 per contract. Investors long the spread are prepared to amass maximum potential profits of $4.20 per contract in the event that MSFT’s shares surge a whopping 49.45% to $37.50 by January 2012 expiration.
Affiliation: Interactive Brokers
Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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