This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Long-Shot Trades in an Uncertain Market

By David Russell, reporter at OptionMonster

NEW YORK ( OptionMonster) -- Wednesday's difficult market caused investors to take long-shot trades with low probability of success but also limited risk.

One such trade occurred in Adtran (ADTN - Get Report) as a block of 1,500 May 29 calls were bought for $2.93 and an equal number of contracts were sold each in the May 35 calls and May 24 puts for 92 cents and $1.81 respectively, according to OptionMonster's real-time tracking systems.

Buying calls gives investors the right to purchase shares at the strike price, and selling calls obligates them to sell at the strike. With puts, sellers are required to buy shares if they fall to the option trade's strike price.

The net result of Wednesday's activity was that the investor paid 20 cents for the trade and will make $6 if Adtran goes back to $35 on expiration. He or she is at risk of losing money only if the stock falls below $24. Adtran, which hasn't traded that low since early 2010, fell 0.84% Wednesday to close at $28.35.

Similar trades occurred in Ultra Petroleum (UPL - Get Report) and BorgWarner (BWA - Get Report). In Ultra Petroleum they sold the June 28 puts for $3.04 and bought the June 32 calls for $3.32, resulting in a cost of 28 cents but providing significant leverage if the stock rallies into the spring. The shares dropped 3.48% to $29.95.

BorgWarner investors sold the January 50 puts and bought the January 75 calls Wednesday, collecting a small credit of about 7 cents. The stock fell 3.24% to $61.90 and needs to rally all the way back to $75 for the trade to earn a profit. The position also won't lose money as long as the shares stay above $50, significantly below their 52-week low.

The common theme in these trades is that they're cheaper than simply buying calls, which we often see when investors are more clearly bullish. They also indicate that traders would be willing to buy shares if they fall significantly from current levels.

Russell has no positions in ADTN, UPL, or BWA.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
ADTN $15.98 0.00%
BWA $60.79 0.00%
UPL $15.55 0.00%
AAPL $130.28 0.00%
FB $81.53 0.00%

Markets

DOW 18,080.14 +21.45 0.12%
S&P 500 2,117.69 +4.76 0.23%
NASDAQ 5,092.0850 +36.0220 0.71%

Partners Compare Online Brokers

Free Reports