Update W/ New Trade: Deutsche Bank (DB) Fading the EU Summit With A Low Premium Short Dated Fly

by Dan December 7, 2011 2:45 pm • Commentary

Update Dec 7th ar 2:45pm: Friday on Options Action I laid out an argument (below) of why I think DB could be the best short of the large money center banks in all of Europe and the U.S. near term, especially if you feel the EU Summit Friday will bring  disappointment.  Here’s a new trade I’m putting on that risks even less premium:

TRADE: DB $39.70 Bought the Dec 37.50/35/32.50 Put Fly for .30

-Bought 1 Dec 37.50 Put for 1.17

-Sold 2 Dec 35 Puts for a total of 1.18 (.59 each)

-Bought 1 Dec 32.50 Put for .31

Break-Even On Dec Expiration:

Profits btwn 37.20 and 32.80 make up to 2.20 with max gain of 2.20 at 35.00

Losses of up to .30 btwn 32.50 and 32.80 and 37.20 and 37.50 with max loss of .30 above 37.50 and below 32.50

This trade is different than the one I laid out last Friday, but I want to look for a low premium defined risk way to play.


Preview of what I will be speaking about Tonight on Options Action at 5pm on CNBC:

World equity markets have had a massive week, with many developed nations seeing rallies of 5-10%.  The DAX rallied 10% this week as it appeared that Central Bankers and Euro-Zone leaders are poised to take a more proactive stance towards containing their Sovereign Debt Crisis.  This weeks coordinated Central bank action lead by our Fed spurred a massive rally from a very oversold condition.  As readers of the site know I am not entirely sure what  lowering the rate of of the dollar swap lines does to attack the root of the debt problems, but I do recognize that it was a symbolic coordinated move that certainly changed the perception of political and finance ministers willingness to act and make sure the that the system will have the proper liquidity in times of financial stress.

The Powers that be on this side of the pond appear to be squarely focused on the potential headwinds for our ever so slightly strengthening economy by a European debt contagion.  One of the more symbolic actions of this crisis could be the upcoming European trip by U.S. Treasury Secretary Geithner to meet with the Head of the ECB, German Central Bank President, German Finance Minister, French Prime minister Sarkozy, French Finance Minister, Italian Prime Minister Monti and Italian Fiance minister all btwn Monday and Thursday afternoon leading up to the Summit.

If we get through the weekend and there are no negative headlines, equity markets markets should continue to rally and European Sovereign debt yields should continue to to temper from recent highs.

At some point next week, with the market and bank stocks higher I want to fade Deutsche Bank‘s 1 week 24% rally as I fear that if we continue to go higher into next week’s highly anticipated events that there could be a bit of a sell the news.  THIS IS NOT A TRADE THAT I HAVE PUT ON YET AND WILL WAIT TO EARLY NEXT WEEK AND WILL RE-EVALUATE THE APPROPRIATE STRIKES BASED ON CURRENT STOCK PRICE.



DB ~$40.35 BUY Jan 35/30 Put Spread for ~1.10

-Buy 1 Jan 35 Put for 2.20

-Sell 1 Jan 30 Put at 1.10

Break-Even on Jan Exp:

Profit btwn 33.90 and 30, make up to 3.90, max gain at 30 or below make full 3.90

Loses btwn 33.90 and 35 lose up to 1.10 and max loss of 1.10 35 or above.