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Beating The Odds on Akamai

Thursday, 28 Oct 2010 | 4:14 PM ET

On last Friday's Options Action, our goal was clear: give you an edge on earnings season. Ironically, Dan Nathanproposed accomplishing said goal by employing a low probability trade: the strangle. And lo and behold, it worked. Before his next move, a quick review.

Unsure of the direction Akamai would take on earnings, but sure of the magnitude of the move, Dan bought the November 50-strike call for $1.75 and the November 44-strike-put for $1.30, net-net, paying $3.10 for a package that is profitable if Akamai trades above $53.10 or below $40.95 by November expiration.

But that's at expiration, and in the mid-term, the trade is still working even though the stock is below the breakeven points.

This morning, you could have exited the trade for about $4, leaving you with a nice profit. Now that package is worth less, about $3.10, leaving you with a push and a hard decision: stay in the trade in hopes the stock moves higher, or clean it up and trade another day.

"If you don't have a conviction on the stock, clean it up," said Nathan.

But if you do think it's going higher, Dan does have an interesting way to manage the trade. His advice? Stay long the structure and sell the November 52.5-strike against it for $1.45, turning the call portion of the strangle into an in-the-money call spread.

Questions, comments send them to us at: optionsaction@cnbc.com

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