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Options Action Recap: Deutsche Bank and Target

In the file of better late than never, thought I'd post Friday's picks from Options Action.

As a bearish bet on the financials, (or a wager on the collective insanity of the ratings agencies), Dan Nathan of Riskreversal.combought the January 35/30 put spread on Deutsche Bank for $1.10, a trade that could be worth as much as $3.90 if DB trades below $30 by January expiration.

Trade and breakdown are below.

DAN'S DEUTSCHE BANK OPTIONS TRADE - STOCK AT $40

  • BUY JAN 35-STRIKE PUT FOR $2.20
  • SELL JAN 30-STRIKE PUT FOR $1.10

HOW DAN'S DEUTSCHE BANK TRADE MAKES MONEY

  • LOSSES ABOVE $33.90
  • PROFITS BETWEEN $33.90 - $30.00
  • PROFITS CAPPED AT $30.00

The other trade required much less premium but carried much greater risk. It came courtesy of Oppenheimer's Carter Worth and Cantor's Mike Khouw. As a bullish play on retailer Target , they bought the January 46/57.5 risk reversal for even money. Specifically, the trade involved selling the January 46-strike put for $0.25 and using that money to buy the January 57.5-strike call for $0.25. The trade costs nothing, but there is a significant tradeoff; by selling that put, Mike could be forced to buy target stock at that put's strike price - or for $46, even if it falls well below that level by expiration.

So far so good, and the trade and breakdown are below.

MIKE'S TARGET OPTIONS TRADE - Stock AT $53

  • SELL THE JAN 46-STRIKE PUT FOR $0.25
  • BUY THE JAN 57.5-STRIKE CALL FOR $0.25

HOW MIKE’S TARGET TRADE MAKES MONEY

  • PROFITS ABOVE $57.5
  • GET LONG $46.00
  • LOSSES BELOW $46.00

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