The top trade so far today is a block of 75,200 Dec 53 calls on the Europe, Australasia, Far East ETF (EFA) for $1.52 per contract electronically on ISE. An investor bought the block, representing $11.43 million in premium, to open, according to ISEE. It might be tied to a block of 947K EFA shares that traded about an hour later at $50.33. Aug 52 calls on the fund are also busy. 21,800 contracts changed hands. Bullish trading on the Ee-fah fund might be a play on Thursday’s ECB rate announcement. Spain’s IBEX was up 2.7 percent to lead European equity markets to start the week ahead on the news. EFA is flat at $50.37 today, but has rallied 5.3 percent over the past three days after ECB President pledged last-Thursday to do whatever it takes to save the euro. Buying the Dec 53 calls on EFA is a bit of a spec play, but if someone is willing to pay $11.43 million in premium to enter into 75,000+ contracts, it makes sense to me as a possible trade idea.
A long call is a basic options 101 strategy that most people understand. If you buy one call option, you are paying a premium for the right to buy 100 shares of the underlying for a set price through a set expiration date. By going long a call option, the investor is basically locking in the right to buy (call) the stock for a set price (strike) through a fixed period of time (expiration date.)The risks and rewards of straight call buying are easy to understand. If the price of the underlying stays below the strike of the call option, the contract is out-of-the-money and, if left open through the expiration, would expire worthless. If so, any premium paid is lost. That’s the maximum risk associated with call buying. The breakeven at expiration is equal to the strike price of the option plus the debit paid. The profit potential is substantial – theoretically unlimited – if shares rally. Call buying is a popular way to participate in a move higher in the underlying.
In the EFA example, shares are trading for 50.37andEFA Dec 53 Calls are trading on the stock for a VWAP of 1.52. The risk to the trade is the debit paid, or 1.52. The potential profit is unlimited as shares move beyond the strike price of the contract and the upside breakeven is equal to the strike price of the call plus the net debit, or 54.52. The OptionsXpress payoff chart shows the risk-rewards and probabilities of success graphically.
Trade Idea- EFA Dec 53 Calls
Bias = BullishRisk = Debit=1.52
Reward = Theoretically unlimited
Stoploss: Move in EFA below July support lows or to less than $47 per share: or 50 percent of premium
Target: 50 percent gain
Download PDF —> EFADEC53CALL
Closed — 8/9/2012
Sites That Link to this Post
- CASE STUDY: EEM Sept 42 – 43.5 – 45 Call Butterfly Spread : WhatsTrading.com | September 9, 2012
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Frederic Ruffy is a well-known trader, writer, and strategist who has spent years educating investors and creating intelligent, insightful, unbiased market observations that are frequently cited by the Wall Street Journal and other financial publications. As senior analyst, Fred provides frequent and regular notes and daily updates for activity of interest.