With the broad market near all time highs, and the market enthusiasm stretching into the New Year, it appears that traders are looking for ways to better define risk on bullish bets in stocks that they believe may enter uncharted territory.
Shares of Comcast (CMCSA) are up 16.5% since mid November, and up 35% from its 52 week lows last January, now just a few % below the all time highs made in late December. A trader apparently made a bullish bet looking out to August expiration in the stock. When the stock was $70.20, a trader sold 10,000 Aug 60 puts at $1.88 to open and bought 10,000 of the Aug 75 / 85 call spreads for $2.13. The call spread risk reversal resulted in a 25 cent debit, or $250,000 in premium, but offers potential gains of $9.75 (or $9.75 million) between $75.25 and $85, with the max gain at $85 or higher, up 21% from the trading level. If the stock is between $70.25 and $60 on Aug expiration the trader would lose the 25 cents in premium. If the stock is $60 or below on Aug expiration then the trader would be put 1 million shares of stock and suffer losses below. On a mark to market basis, the position would lose money as the stock trades lower towards or below the short put strike, and would gain as the stock gets closer or above the long call strike.
What’s interesting about this trade is that the initiator is willing to sell a downside put to help finance the purchase of the out of the money call spread that is profitable only at a new all time high. The choice of the short put strike, $60 also happens to be what appears to be important technical support, a double bottom of the May and November lows:
This is a good strategy with markets at all time highs for those wanting to play for a breakout, willing to buy below, but afraid of chasing the market and getting caught offsides before a slight correction from highs. We have been detailing similar strategies on the site and will continue to do so as it seems best to not dive headlong into what could be a rally (since the election) that can be paralyzing for those looking to buy stocks for breakouts, but worried about being late to the party. Yesterday, Mike and Mark detailed a risk reversal as a stock alternative for those looking for new highs in INTC.