After the close last night, Chinese Internet concern SINA Corp.
) 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
on SINA Corp.
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
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:
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:
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.