announced this morning
put buying on the International Securities Exchange
A look at MA's technical backdrop reveals a potential driver for
this growing pessimism for the security, as the stock is in danger
of creating a double-top formation in the $255-$256 region. A
resolution of this pattern could send MA sharply lower. On the
other hand, a breakout above this area of technical resistance
could clear the way for MA to extend its rebound off its September
lows near $190.
It is possible that a similar line of reasoning drove some
unusual options activity on MA this morning, as one speculative
options trader eschewed the popular puts in favor of a
call-oriented strategy. Specifically, a block of 140 December 260
calls traded on the Chicago Board Options Exchange (
) at about 9:53 a.m. Eastern time for the ask price of $1.21, or
$1221 per contract.
At the same time, 70 contracts traded on the December 250 call
for the bid price of $4.20, or $420 per contract, and 70 contracts
traded on the December 270 call for the bid price of $0.22, or $22
per contract. Given this data, it would appear that we are looking
short butterfly spread
The Anatomy of a MasterCard Short Butterfly
Getting down to business, the trade breaks down like this: The
trader received a credit of $29,400 for selling 70 December 250
calls -- ($4.20 * 100)* 70 = $29,400 -- and $1,540 for selling 70
December 270 calls -- ($0.22 * 100)* 70 = $1,540. Meanwhile, the
trader incurred a debit of $16,940 for buying 140 December 260
calls -- ($1.21 * 100)* 140 = $16,940. As a result, the position
results in a total credit of $14,000 -- ($29,400 + $1,540) -
$16,940 = $14,000.
But, how does one profit from this situation? Normally when
trading call options, the trader needs the stock to rally. However,
since the trader sold the December 250 and 270 calls, this
complicates the position beyond a normal "rally = profit"
For the record, a short butterfly spread trader is looking for
the stock to move sharply; direction doesn't matter. Those of you
who are familiar with straddles and strangles will also be familiar
with the need for a sharp, direction-doesn't-matter move. This is
where the similarities between straddles/strangles and short
butterflies end, however; a short butterfly uses only calls (or
puts, but never both), is opened with a credit (not a debit), and
has a maximum profit equal to the credit received upon entering the
The short butterfly has two breakeven points. The first
breakeven point for today's MA trade is found by adding the premium
received ($2.00) to the sold December 250 call: 250 + 2.00 = $252.
The second breakeven point is arrived at by subtracting the premium
received ($2.00) from the sold December 270 call: 270 - 2.00 =
The maximum gain is equal to the total premium received --
$14,000. The maximum loss, in the event that the shares were to get
pinned at the purchased strike, is limited to the difference
between the December 250 and 260 calls, minus the net credit
received: (260 - 250) - 2.00 = $8.00.
After the short butterfly position has been established,
increasing implied volatility is neutral to the overall position,
as it lifts the price of both the sold and purchased options. At
the time of the trade, implieds for the December 250 call were
28.68%, the implied volatility for the December 260 call was
29.68%, and the implieds for the December 270 call came in at
29.67%. MA's one-month historical volatility was perched at 33.28%
as of the close of trading on Wednesday.
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