It's a slow day in the options market, and investors are expecting a slow couple of months in terms of Dell (DELL) price action - and they are taking on a lot of risk to bet on this. The January 14 straddle has been active today. (A straddle is the simultaneous purchase or sale of a call and put with the same expiration date and same strike price). In this case, the straddle was sold 8,000 times for $1.47 (an average of 55 cents for the out-of-the-money put and an average price of 92 cents for the in-the-money call). The volume crossed the tape around 11:00 AM Eastern time in two large blocks of 4,000 straddles.
Maximum profit for a short straddle is simply the credit collected, or $1.47 for this Dell trade. For the investor to book this entire credit, however, both options have to expire worthless, meaning the stock has to be trading right at $14 - no more, no less - when January expiration rolls around.
Maximum risk for a short straddle is a little dicey - selling straddles is not for the faint of heart. The risk is theoretically unlimited to the upside, should DELL rally, and limited to the downside only by the zero mark. The maximum risk to the downside is $12.53, or the strike price minus the premium already collected. The breakeven prices are $12.53 to the downside and $15.47 to the upside, giving DELL a range of 21% to work with before losses set in.
Earnings aren't due again from DELL until February 18, weeks after these options cease trading. And today's active options traders are expecting DELL to stay relatively range-bound from now until January 15th.
Beth works for The Options News Network (www.ONN.tv), which provides daily stock and options commentary. The above comments are not intended as trading advice.
Maximum risk for a short straddle is a little dicey - selling straddles is not for the faint of heart. The risk is theoretically unlimited to the upside, should DELL rally, and limited to the downside only by the zero mark. The maximum risk to the downside is $12.53, or the strike price minus the premium already collected. The breakeven prices are $12.53 to the downside and $15.47 to the upside, giving DELL a range of 21% to work with before losses set in.
Earnings aren't due again from DELL until February 18, weeks after these options cease trading. And today's active options traders are expecting DELL to stay relatively range-bound from now until January 15th.
Beth works for The Options News Network (www.ONN.tv), which provides daily stock and options commentary. The above comments are not intended as trading advice.
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