Long-Shot Trades in an Uncertain Market
Yesterday's difficult market caused investors to take long-shot trades with low probability of success, but also limited risk.
One such trade occurred in Adtran as a block of 1,500 May 29 calls were bought for $2.93 and an equal number of contracts were sold each in the May 35 calls and May 24 puts for 92 cents and $1.81, respectively, according to OptionMonster's real-time tracking systems.
Buying calls gives investors the right to purchase shares at the strike price, and selling calls obligates them to sell at the strike. With puts , sellers are required to buy shares if they fall to the option trade's strike price.
The net result of yesterday's activity was that the investor paid 20 cents for the trade and will make $6 if Adtran goes back to $35 on expiration. He or she is at risk of losing money only if the stock falls below $24. Adtran , which hasn't traded that low since early 2010, fell 0.84 percent yesterday to close at $28.35.
Similar trades occurred in Ultra Petroleum and BorgWarner. In Ultra Petroleum, they sold the June 28 puts for $3.04 and bought the June 32 calls for $3.32, resulting in a cost of 28 cents, but providing significant leverage if the stock rallies into the spring. Ultra Petroleum shares dropped 3.48 percent to $29.95.
BorgWarner investors sold the January 50 puts and bought the January 75 calls yesterday, collecting a small credit of about 7 cents. The stock fell 3.24 percent to $61.90 and needs to rally all the way back to $75 for the trade to earn a profit. The position also won't lose money as long as BorgWarner stays above $50, significantly below its 52-week low.
The common theme in these trades is that they're cheaper than simply buying calls, which we often see when investors are more clearly bullish. They also indicate that traders would be willing to buy shares if they fall significantly from current levels.
—Russell has no positions in ADTN, UPL, or BWA.
Additional News: Adtran to Buy Nokia Siemens Networks Broadband Unit
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David Russell is a reporter and writer for OptionMonster.