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.
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.
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:
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:
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.