Learn Options Trading: Example Strategies in DirecTV (DTV)
So what can stock investors do with this new “hold” rating? Not much, since a stock going nowhere doesn’t offer many opportunities for investors buying or shorting stock. But as you’ll see below, options traders have a wider variety of strategies to choose from. Not only can they formulate trades when they may feel bullish or bearish; they can open trades based on the theory that the stock isn’t going to go anywhere for a while.
Below are just two examples of ways options investors could trade into DTV. These are not buy-sell-hold recommendations – just a pair of potential strategies – one neutral, one bullish.
*Option prices given as of Tuesday morning
Neutral Option Strategy: Short Iron Condor
For those who agree with Mr. Bazinet and expect DTV will be going nowhere fast, an intermediate-term iron condor might fit the bill. A short, near-the-money June iron condor can be sold for about $1.00 by simultaneously selling the June 32 put, buying the June 30 put, selling the June 35 call, and buying the June 37 call. (An iron condor basically combines a bull put spread and a bear call spread).
Maximum profit for this short condor is the total credit collected, or $1.00, and can be collected if DTV is trading between 32 and 35 when these options expire on June 18th. Maximum loss is also $1.00, as it is the difference between the put (or call) strikes ($2.00), minus the $1.00 credit. Breakevens for this trade are $31 and $36. Below $31 or above $36, losses begin to accrue but are capped at $30 and $37.
Bullish Option Strategy: Long Call
Investors who still think DTV has potential good news (and upside) in its long-term future might consider an old-fashioned long call, buying the January 30-strike calls for $6.20 per contract. The long call buyer runs the risk of losing 100% of this premium paid, but can enjoy unlimited upside if DTV in fact rallies higher. At expiration, breakeven for this position is $36.20.
Are investors ready to switch off DirecTV, or is the stock poised for more upside? Or are you even more skeptical than Citigroup? Let us know your thoughts in the comments below.
If you are new to options and still trying to get your feet wet, it’s helpful to start by trying your trades in a virtual trading account.
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