Garmin Ltd. (
GRMN
) has attracted quite a bit of attention lately, with the shares
rallying more than 10% since Nov. 30. However, this sharp rebound
has pushed GRMN into former support/resistance at its 10-month
moving average. While options activity has been light in response
to this strong price action, one options trader appears to have
entered a straddle on the security.
Drilling down on today's GRMN straddle, the trader purchased 72
December 32 calls for the ask price of $0.61, or $61 per contract,
on the Chicago Board Options Exchange (
CBOE
) at 11:42 a.m. Eastern time. As you would expect with a straddle
position, the other half of this trade crossed on GRMN's December
32 put, where 72 contracts changed hands at the same time on the
same exchange for the ask price of $0.91. By implementing this
strategy, the trader needs GRMN 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 Garmin Ltd. Straddle
In today's GRMN straddle, the trader purchased 72 December 32
calls for $4,392 -- ($0.61 * 100) * 72 = $4,392. At the same time,
the trader also purchased 72 December 32 puts for $6,552 -- ($0.91
* 100) * 72 = $6,552. The total outlay for this position would be
$10,944 -- $6,552 + $4,392 = $10,944.
There are two ways of determining the maximum profit on a
straddle position. If GRMN jumps higher, then the maximum profit is
theoretically unlimited, as there is no cap to how high the shares
can rally. If GRMN 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 $30.48 -- 32 - 1.52 = $30.48
-- or $3,048 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 $33.52 -- 32 +
1.52 = $33.52 -- on the upside, and $30.48 -- 32 - 1.52 = $30.48 --
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:
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 GRMN December
32 call were 31.13%, while the implied volatility for the December
32 put rested at 34.11%. For comparison, the stock's one-month
historical volatility arrived at 29.80% as of the close of trading
on Friday.