Options Trade of the Day: Betting on Support for SanDisk Corp.

By
A A A

Shares of SanDisk Corp. ( SNDK ) have jumped more than 3% today, tagging a fresh three-year high after receiving boost from a bullish brokerage note. Specifically, Goldman Sachs lifted its price target on SNDK to $43 per share from $36 per share. That said, the brokerage firm appears late to the party, as Thomson Reuters reports that the average 12-month price target for SNDK rests at $49.86 per share.

Daily chart of SNDK since November with 10-day and 20-day moving averages

Options speculators, however, appear to have turned a blind eye to Goldman's upgrade, as SNDK's put volume has swelled more than 13,000 contracts, compared to the stock's average daily put volume of 9,655 contracts. That said, a closer look at today's activity reveals that some of SNDK's put volume has a bullish slant.

For instance, a block of 100 SNDK January 2011 50 puts traded at the bid price of $0.85, or $85 per contract, on the Chicago Board Options Exchange ( CBOE ) at about 12:05 p.m. At the same time, a block of 100 SNDK January 2011 46 puts crossed on the ISE for the ask price of $0.22, or $22 per contract. Given this data, it would appear that we are looking at a short vertical put spread, more commonly known as a credit spread , on SanDisk Corp. This options strategy is also known as a short put spread, or a bull put spread.

SNDK put option volume details

The Anatomy of a SanDisk Corp. Short Vertical Put Spread

Getting down to business, the trade breaks down like this: The trader pays $2,200 for 100 January 2011 46 puts -- ($0.22 * 100) * 100 = $2,200. Meanwhile, the trader receives a credit of $8,500 for selling 100 January 2011 50 puts -- ($0.85 * 100) * 100 = $8,500. As a result, the trader has pocketed a net credit of $6,300 -- $8,500 - $2,200 = $6,300. The breakdown for this credit spread is listed below:

SNDK short vertical put spread breakdown

Breakeven for this trade is equal to the sold strike minus the credit received, or $49.37 -- $50 - $0.63 = $49.37. The maximum gain is equal to the total premium received -- $6,300 -- while the maximum loss is limited to the difference between the January 2011 50 put and January 2011 46 put, minus the net credit received, and is reached if SNDK trades at or below the purchased January 2011 46 strike. In this case, the maximum loss is $3.37, or $337 per pair of contracts -- (50 - 46) - $0.63 = $3.37. Below is a chart for a visual representation:

SNDK short vertical put spread profit/loss chart

Implied Volatility

After the short vertical put spread has been established, increasing implied volatility is pretty much neutral to the overall position, as it lifts the value of both the sold option and the purchased option. At the time of the trade, implieds for the January 2011 50 put arrived at 45.26%, while the implied volatility for the January 2011 46 put rested at 39.38%. SNDK's one-month historical volatility was 28.80%, as of the close of trading on Tuesday.



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

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


This article appears in: Investing , Options

Referenced Stocks: CBOE , SNDK

Schaeffer's Investment Research

Schaeffer's Investment Research
  • See all for Schaeffer's Investment Research
  • View Print Version

More from Schaeffer's Investment Research:

Related Videos

Stocks

Referenced

Most Active by Volume

70,277,774
  • $6.68 ▼ 5.25%
53,353,579
  • $3.39 ▼ 1.45%
37,231,289
  • $98.9389 ▲ 1.30%
35,372,488
  • $74.95 ▼ 0.32%
28,295,343
  • $15.485 ▼ 0.67%
27,243,442
  • $75.4982 ▲ 24.46%
26,397,348
  • $56.075 ▲ 3.42%
25,374,104
  • $25.53 ▼ 1.01%
As of 7/28/2014, 02:42 PM