Citrix Systems, Inc. (NASDAQ:CTXS) – provider of infrastructure software and supplies – saw a long-term, bullish, four-legged spread trade midday Monday. While the volume was not incredibly large (2,500 contracts traded on each leg of the spread), the overall strategy is interesting and worthy of commentary.
The strategy traded in January 2012 expiry was a broken-wing long iron condor. At roughly 12:30 p.m. Eastern Time, the following strikes were active:
- January 2012 65 call: 2,500 contracts traded near the ask price of $7.30 per contract
- January 2012 75 call: 2,500 contracts traded near the bid price of $3.90 per contract
- January 2012 50 put: 2,500 contracts traded near the bid price of $6.35 per contract
- January 2012 55 put: 2,500 contracts traded near the ask price of $8.90 per contract
Evidently, the trader bought the call spread (buying the 65 strike, selling the 75 strike) and simultaneously bought the put spread (buying the 55 strike, selling the 50 strike). The net debit for this spread was $5.95 (for a total of almost $1.5 million for the 2,500-lot).
Note that the spread between call strikes is twice as wide as the spread between put strikes. Hence the "broken wing" nature of this trade. At expiration in 15 months or so, the maximum gain is $4.05 per spread ($1.01M in total) if CTXS is trading above the short call strike (75). This is the difference in call strikes less the total premium paid for the spread. The maximum loss is limited to the $5.95 premium paid and occurs if CTXS is trading between the long strikes (55 and 65).
Below the 50 strike, losses are capped at 95 cents per spread, or the difference between put strikes minus the maximum profit. The lone breakeven level is $70.95, or the short call minus the maximum profit. Anywhere below this level, the spread is in losing territory at options expiration. This is a complex strategy, but the OptionsHouse Profit and Loss Calculator can help illustrate potential outcomes.
Currently, this strategy has a slightly positive delta skew of roughly 8 per spread. In other words, it should advance (albeit slightly) if CTXS shares gain ground. Vega is also positive, so the spread should theoretically react favorably to a positive change in implied volatility.
Speaking of volatility, Citrix is scheduled to report earnings next Thursday (October 21) and analysts expect per-share results of 49 cents. This is an improvement of six cents (14%) from year-ago levels. The company has surprised analysts' expectations to the upside in seven of the last eight reporting periods. Given the long-term nature of the options traded today, this is likely not an earnings-related play. It will be interesting nevertheless to watch and see how these traders react if the stock has a dramatic reaction to its report.
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