CYD – China Yuchai International, Ltd. – A three-legged bearish options combination play on the holding company with a controlling interest in Yuchai, a Chinese diesel engine manufacturer, indicates one strategist is bracing for share price erosion through September expiration. The price of the underlying stock slipped 0.45% to $18.74 by 12:00 pm ET. It looks like the investor responsible for the transaction sold 6,350 calls at the September $20 strike at a premium of $0.60 each, purchased the same number of puts at the September $17.5 strike for a premium of $0.85 apiece, and sold 6,350 puts at the lower September $15 strike at a premium of $0.15 a-pop. The net cost of buying the combo trade amounts to $0.10 per contract. Thus, the investor is prepared to either make money or protect the value of a position in the underlying shares, should he hold one, if CYD’s shares fall another 7.15% from the current price of $18.74 to breach the effective breakeven point at $17.40 by September expiration. If this transaction represents an outright bearish bet rather than a protective play the trader is prepared to amass maximum potential profits of $2.40 per contract as long as shares plunge 19.95% to trade below $15.00 by expiration day next month. The short position in calls exposes the trader to potentially unlimited losses, assuming no offsetting long stock position is held, if CYD’s shares fly upward. Losses in this scenario start to accumulate if shares exceed $20.00 ahead of expiration day.
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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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