Danaher Corp. (
) has attracted quite a bit of attention today, as investors react
to a bullish brokerage note from UBS. Specifically, the firm lifted
its price target on DHR to $52 from $49 per share. DHR quickly
broke out to a fresh all-time high following the news, with the
equity encroaching on the $47 level.
Naturally, options traders have taken an interest in DHR in the
wake of today's record high, but these speculative investors appear
to be favoring puts over calls. For instance, put volume has
swelled to more than 2,100 contracts, more than 17 times the
stock's daily average. Drilling down on this activity reveals that
at least one trader is betting on a short-term spike in volatility
by entering a DHR
Specifically, the trader purchased 54 December 47.50 calls for
the ask price of $0.10, or $10 per contract, on the Chicago Board
Options Exchange (
) at 11:38 a.m. Eastern time. As you would expect with a straddle
position, the other half of this trade crossed on DHR's December
47.50 put, where 54 contracts changed hands at the same time on the
same exchange for the ask price of $1.37, or $137 per contract. By
implementing this strategy, the trader needs DHR to move sharply by
the time these options expire at the close of trading on Friday,
Dec. 17; direction doesn't matter.
For those not familiar with this options strategy, a straddle is
the simultaneous purchase or sale of an equal number of puts and
calls on a given underlying stock with the same expiration and
strike price. The straddle purchaser is looking for a large move by
the stock, one that exceeds the focus strike by more than the
amount of the premium paid for both options.
The Anatomy of a Danaher Corp. Straddle
In today's DHR straddle, the trader purchased 54 December 47.50
calls for $540 -- ($0.10 * 100) * 54 = $540. At the same time, the
trader also purchased 54 December 47.50 puts for $7,398 -- ($1.37 *
100) * 54 = $7,398. The total outlay for this position would be
$7,938 -- $7,398 + $540 = $7,938.
There are two ways of determining the maximum profit on a
straddle position. If DHR jumps higher, then the maximum profit is
theoretically unlimited, as there is no cap to how high the shares
can rally. If DHR plunges, the maximum profit is limited to the
purchased strike minus the total debit paid. For this position, the
maximum profit from a downside move is $46.03 -- 47.50 - $1.47 =
$46.03 -- or $4,603 per contract.
There are also two breakeven points for this position. They are
calculated by adding and subtracting the net debit to or from the
focus strike. For the example, the breakevens are $48.97 -- 47.50 +
1.47 = $48.97 -- on the upside, and $46.03 -- 47.50 - 1.47 = $46.03
-- on the downside. Finally, the maximum loss is limited to the net
debit paid upon entering the position. Below is a chart for a rough
Traders should not be afraid of rising implied volatility
following the initiation of a straddle position. An increase in
implieds boosts the value of the purchased options, allowing the
trader to collect a higher return by selling (to close) the
position. At the time of the trade, implieds for the DHR December
47.50 call were 23.06%, while the implied volatility for the
December 47.50 put rested at 20.78%.
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