RSH – RadioShack – Shares of the retailer of consumer electronics goods and services fell 5.6% to $21.15 by 3:20 pm (ET), surrendering Tuesday’s rally, which was catalyzed by renewed speculation that RadioShack may be the target of a takeover bid. CNBC reported that a sale of the firm does not appear to be right around the corner, sending the price of the underlying stock down as much as 8.4% today to an intraday low of $20.52. Opposite-minded options tacticians populating the August contract initiated diverse strategies today. Some investors sold straddles, which suggests they expect RSH shares to stagnate rather than experience the significant rally one might expect to see if the electronics retailer were purchased ahead of August expiration. Straddlers sold approximately 5,000 calls at the August $21 strike for an average premium of $1.53 apiece, and sold roughly 5,000 puts at the same strike for an average premium of $1.27 each. Gross premium enjoyed on the transaction amounts to an average of $2.80 per contract. Investors short the straddle keep the full premium as long as RadioShack’s shares settle at $21.00 at expiration. Traders are exposed to potentially devastating losses should shares suddenly fly higher or fall off a cliff. Losses accumulate for straddle-sellers if shares rally above the upper breakeven price of $23.80, or if shares trade below the lower breakeven price of $18.20 by expiration day. Finally, an investor holding out hope for RadioShack’s shares to surge ahead of August expiration purchased a plain-vanilla debit call spread. This trader is not ready to throw in the towel on takeover chatter, and has thusly prepared to profit should RSH shares jump in the next month. The investor purchased 10,000 calls at the August $23 strike for a premium of $0.75 each, and sold the same number of calls at the higher August $24 strike for a premium of $0.45 apiece. The net cost of buying the spread amounts to $0.30 per contract. Profits start to amass for the investor if shares rally 10.15% over the current price of $21.15 to exceed the effective breakeven price of $23.30. The trader walks away with maximum potential profits of $0.70 per contract should RadioShack’s shares jump 13.5% to trade above $24.00 by August 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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