> My bet is that it was a spread -- he bought the 75's and sold the 65's.
I think you are right. The MUNMs (65) went through at the bid, and the MUNOs (75) at the ask.
To JSI:
Let's assume it is a spread.
In buying 1000 contracts of MUNO ("put" options on MU that expire the third Friday of February, strike price $75) he stands to make money as long as MU is on track to finish at $71.25, or less, by that expiry date ($71.25 = $75 strike - $3.75 option cost).
But at the same time he SOLD 1000 contracts of MUNM (same expiry date, but strike price of $65). In selling puts he stands to make money as long as MU is on track to finish at $64.125, or MORE, by expiry ($64.125 = $65 strike - $0.875 proceeds from short sale).
Combined together, there is some profit as long as MU is on track to finish below $72.125. The maximum profit is in the whole area below a line that ends with MU at $65 at expiry. The profit is $10 or so, possibly more if closed before expiry ($10.75 = $75 strike - $65 MU at expiry + $0.875 proceeds from short sale - about $0.125 cost of closing long leg).
The investment cost of this position is only $2.875 ($3.75 - $0.875) so the potential profit is a maximum of about 275% (10.75/2.875-1). The potential loss is limited to a maximum of 100%.
All of the dollar figures above are "per share". There are 100 shares per contract, so for 1000 contracts multiply by 100,000 to get actual dollar figures.
In contrast, without the short leg, the maximum profit is unlimited. The position would cost only slightly more ($3.75), would become profitable only slightly lower (track to $71.25), and reaches the spread's profit maximum about $4 lower at $61 ($75 strike - $3.75*[1+275%] ). Lower than that, profits are greater with only the long put leg.
The spread is therefore preferable if you believe MU is unlikely to go below $61 or so in the next three weeks, but likely to go below $72.
Land_Lubber |
