The Tax Break That Millions Miss Out On
I Was Told There Would Be No MathOption volume has ramped up today on KeyCorp (KEY), with activity rising well beyond the usual level on both the call and put side of the tape. Taking a closer look at some of the major block trades on this regional banking issue, it appears that a single spread strategist is responsible for a healthy portion of this option volume.
Specifically, the trader purchased a block of 10,000 June 10 calls for $0.50 each, and simultaneously sold 10,000 June 8 puts for $0.25 each. The result was a net debit of $0.25 per pair of contracts -- which means the speculator can begin collecting profits on those purchased calls if KEY rallies beyond $10.25 by June expiration.
Meanwhile, the lower break even on the trade stands at $8.25 (the sold put strike, plus the net debit). Since it doesn't appear that this option trade was tied to a corresponding position in KEY shares, losses could be substantial if the stock drops below $8 prior to June expiration.
In fact, this spread more or less mimics the risk/reward profile of a long stock position. A true synthetic long spread is typically initiated at a single strike, so this example would be described as a "split strike" synthetic long.
Scanning the headlines for KEY, it looks as though some unsubstantiated buyout buzz is driving today's bullish option activity. Rumors indicate that the Cleveland-based bank could be acquired by Toronto-Dominion Bank (TD) for $10 to $11 per share. As a result, KEY is up about 3% at last check.
Elizabeth Harrow is a senior equities analyst and editor in the research department at Schaeffer's Investment Research.
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