Options Trade of the Day: A Danaher Corp. Straddle


Shutterstock photo

Danaher Corp. ( DHR ) 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.

Daily DHR chart with 10-day and 20-day moving averages

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 straddle .

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 ( CBOE ) 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.

DHR December 47.50 call and put volume

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.

DHR strangle breakdown

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 visual representation:

DHR straddle profit/loss chart

Implied Volatility

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%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.

This article appears in: Investing Options
Referenced Stocks: CBOE , DHR

More from Schaeffer's Investment Research


Schaeffer's Investment Research

Schaeffer's Investment Research

Follow on:

Find a Credit Card

Select a credit card product by:
Select an offer:
Data Provided by BankRate.com