A Bull Call Spread and a Synthetic Short Play in Polycom (PLCM) Options
![Polycom videoconferencing device Polycom videoconferencing device](http://farm1.static.flickr.com/54/167559029_ca69a9786b.jpg)
Ms. Finerman believes that complications from the volcanic explosion in Iceland could spark renewed interest in video conferencing technology, which could benefit PLCM’s bottom line. She also thinks PLCM delivered good earnings and has the attractive quality of “cheap valuation.” The equity’s forward price-to-earnings (P/E) ratio comes in at 18.21 and the stock closed Monday at $32.78.
For investors who want to explore option trading strategies in Polycom, here are two hypothetical trades. These are not recommendations, but examples of how two different strategies (one bullish, one bearish) might play out if the stock rallies or declines.
*Prices given as of Monday’s close
Bullish Option Strategy: Bull Call Spread
For those who agree with Ms. Finerman, a bull call spread offers a limited risk, limited reward way to trade the shares. The July 27.50/35 call spread can currently be purchased for an overall net debit of $5.00 (by buying the in-the-money July 27.50 call and selling the out-of-the-money July 35 call). The trader risks 100% of this premium paid (if the stock were to be trading below $27.50 at expiration) but can make as much as $2.50 if PLCM is trading above $35 when these options expire. Breakeven for this strategy is $32.50; anywhere above this level at expiration, the spread will be profitable.
Bearish Option Strategy: Synthetic Short Stock (Split Strikes)
Investors who are skeptical on the shares’ intermediate-term prospects could consider a synthetic short stock, also known as a risk reversal. By buying the October 30 put for $2.50 and simultaneously selling the October 35 call for $2.50, the investor creates a zero-cost spread that behaves similarly to a short stock position. Additionally, the split strikes make the strategy less aggressive than a traditional synthetic short stock, as it broadens the breakeven zone.
If PLCM continues to trade between the two strike prices, the investor will neither collect nor lose any premium. Below 30, potential profit is significant and capped only if PLCM falls to zero. Above 35, potential risk is unlimited as the long put expires worthless, leaving a naked short call.
Your Thoughts on Polycom?
Does Ms. Finerman’s rationale make sense or do you see some downside ahead? How would you play Polycom?
Compare OptionsHouse rates for stock options with other brokers. For investors who are new to options and want to try out their trades without committing real money, practice using a free virtual trading account.
Photo credit: Kai Hendry
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