CAL – Continental Airlines, Inc. – A large-volume put spread involving a total of 40,000 July contract put options was likely initiated by an investor bracing for a potential pullback in the price of the underlying in the next several weeks to July expiration. Shares of Continental Airlines are down 1.01% to $24.52 just after 12:45 pm (ET). It looks like the options strategist purchased 20,000 puts at the July $20 strike for an average premium of $0.28 apiece, and sold the same number of puts at the lower July $17 strike for a premium of $0.13 each. The net cost of the debit spread amounts to $0.15 per contract. The spread yields maximum potential profits of $2.85 per contract if CAL’s shares plunge 30.7% from the current price of $24.52 to settle at or below $17.00 by expiration day. Profits start to accumulate if shares of the U.S. carrier fall 19% to trade beneath the average breakeven price of $19.85. We note the July $17 strike puts traded at the asking price of $0.13 per contract, but the July $20 strike puts were marked to the middle of the market at $0.28 each. If the investor is actually initiating a credit spread, rather than a bearish debit spread, he pockets a net credit of $0.15 per contract and keeps the full amount received as long as shares exceed $20.00 through July expiration day. In the credit spread scenario, the investor could lose up to a maximum of $2.85 per contract if CAL’s shares nosedive down to trade below $17.00 by expiration in July.
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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