A tutorial in one type of options strategy.
From Schaeffer's Research:
One strategist is betting on a short-term pullback for the solar stock
China-based alternative-energy concern Trina Solar Limited (TSL) was a hot item in the options pits on Thursday, with both call and put activity picking up steam ahead of options expiration.
By the closing bell, TSL had seen about 4,700 puts change hands, more than doubling its average daily volume of fewer than 2,200 contracts. On the flip side of the coin, the security saw roughly 13,000 calls cross the tape, more than tripling its expected daily volume of around 4,000 contracts.
In fact, yesterday's affinity for calls over puts echoes the recent trend on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE). During the past two weeks on the exchanges, TSL has racked up a call/put volume ratio of 5.91, in the 92nd annual percentile. In other words, speculators on the ISE and CBOE have bought to open TSL calls over puts at a faster clip only 8% of the time during the past year.
What's more, taking a closer look at yesterday's option activity indicates that even some near-term put traders can't quite commit to TSL's bearish bandwagon.
Around midday on Thursday, one investor bought a block of in-the-money May 28 puts for the ask price of $2.29. However, to reduce both the initial cost and the maximum risk of the trade, the strategist simultaneously sold an equal amount of out-of-the-money May 25 puts for the bid price of $0.94. In other words, the trader established a bear put spread on TSL, for a net debit of $1.35 ($2.29 - $0.94) per pair of puts.
The best-case scenario is for the shares of TSL to finish at or slightly below the $25 level by May options expiration. In this instance, the intrinsic value of the 28-strike puts will offset the cost to buy back the 25-strike puts, resulting in a net profit. In any case, the most the investor can possibly make is capped at $1.65 (difference between strikes – net debit) per pair of puts. As such, in the event of a significant retreat, the trader may kick himself for not simply buying the May 28 put, which would generate a more lucrative gain....MORE