Wednesday, July 20, 2011

Teva - Risk Reversal - Hoping to add a second lot

CCI once again looking to add a lot of Teva to the portfolio.  General rational for wanting to acquire shares is in the original post below.

Teva Time

With Teva trading back around $47.50 today, CCI wanted to act prior the potential catalyst from earnings  next week.   Instead of just buying a lot at $47.50, I decided to reentered via an risk reversal options play.
Sold the Aug.$47.50 puts and bought the Aug $50 calls for a net credit of $.97.  (about 2% of risk capital)
Scenarios if held to maturity
- The stock falls below $47.5 -  CCI owns a second lot at around $46.53.  That could be bad, but is 2% "less bad"  than if the stock was bought today and then falls.
- The stock stalls and continues to trade in the $47.50-$50.00 range.  CCI keeps the 2 % option premium. We will never go broke 2% gain in a month
- The stock breaks out over $50.  Something CCI has been thinking might happen for several months, so this time into the trade we wanted to keep some upside involved in the trade.  In this case CCI keeps the 2% premium and matches the gain over $50 at least at 1:1.   Of course, if the stock does break out we will have only made the 2% option premium instead of the 5% spread between strike prices, but that is the price paid for having a lower downside entry point if the stock falls.

Earnings July 27. Stay tuned.

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