Options Trade of the Day: Short Strangling SINA Corp. Post Earnings


After the close last night, Chinese Internet concern SINA Corp. ( SINA ) reported that its third-quarter net income rose 87%, as the company's user base soared to roughly 50 million. SINA also boosted its fourth-quarter revenue outlook. Not surprisingly, options activity has been brisk on the security, with 11,000 calls changing hands so far today, more than quintupling the equity's daily average call volume. The most active strike has been the November 60 call, where about 3,000 contracts have traded.

However, the most interesting options trade of the day comes from a speculator who appears to be forecasting a post-earnings trading range for SINA. Specifically, 63 December 67.50 calls crossed the tape at 9:42 a.m. Eastern time on the International Securities Exchange (ISE) for the bid price of $0.76, or $76 per contract. Simultaneously, 63 contracts traded on SINA's December 57.50 put at the same time on the same exchange for the bid price of $2.34, or $234 per contract. Given this data, it would appear that we are looking at a short strangle on SINA Corp.

SINA December 67.50 call and December 57.50 put volume details

While a long strangle anticipates a sharp move in the underlying stock beyond the purchased strikes, a short strangle is a strategy that requires the equity to remain pinned between the two sold strikes. Basically, a short strangle is a bet that the security will remain in a trading range, thus allowing the sold options to expire worthless, and the trader to retain the entire premium received at initiation.

The Anatomy of an SINA Corp. Short Strangle Position

Getting down to business, the trade breaks down like this: The trader receives a credit of $4,788 for selling 63 December 67.50 calls -- ($0.76 * 100) * 63 = $4,788. Meanwhile, the trader receives an additional credit of $14,742 for selling 63 December 57.50 puts -- ($2.34 * 100) * 63 = $14,742.

So, we have one sold December 67.50 call for every sold December 57.50 put, and the trader has pocketed a premium of $19,530 -- ($14,742 + $4,788) = $19,530. The breakdown for this short strangle position is listed below:

SINA short strangle breakdown

The sweet spot for this trade lies between $57.50 and $67.50 per share. If SINA closes within this range on Dec. 17, when these options expire, the trader will be able to keep the entire $19,530 credit, which represents the maximum profit for this trade.

Meanwhile, there are two breakeven points for this position. The first is equal to the sold 57.50 strike minus the net credit received, or $54.40 -- 57.50 - 3.10 = $54.40. The second is equal to the sold 67.50 strike plus the net credit received, or $70.60 -- 67.50 + 3.10 = $70.60.

Finally, the maximum loss is theoretically unlimited to the upside, as there is no limit to how high SINA could rally. On the downside, losses are potentially heavy, but limited to the sold 57.50 strike minus the net credit received. In this case, losses on a plunge in SINA shares are limited to $54.40, or $5,440 per contract. Below is a chart for a visual representation of this trade's profit/loss scenario:

SINA short strangle profit/loss chart

Implied Volatility

After the short strangle has been established, rising implied volatility becomes the bane of the trader's existence, so to speak. As implieds increase, the prices of the two sold options also increase, making an exit that much more expensive, should the trader need to cut and run. At the time of the trade, implieds for the December 57.50 put arrived at 45.28%, while the implied volatility for the December 67.50 call came in at 46.80%. For a point of reference, SINA's one-month historical volatility was 43.13% 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: SINA

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



Most Active by Volume

  • $10.50 ▲ 3.04%
  • $29.22 ▲ 4.62%
  • $16.36 ▼ 0.49%
  • $113.29 ▲ 0.33%
  • $2.39 ▲ 4.82%
  • $5.78 ▲ 0.87%
  • $105.62 ▼ 0.02%
  • $28.42 ▲ 2.53%
As of 8/28/2015, 04:15 PM

Find a Credit Card

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