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business newsStock Substitution Trade for Baxter
By
Fil Zucchi
Jan 11, 2011 12:30 pm
Details of a successful structured option trade.
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Back in April of last year I put ratio spreads on Baxter (BAX) puts (Buzz & Banter subscription required for links). Later on, as the stock faded, I chose to let the short leg of the puts get assigned to me and ended up buying the stock. The net effect of that trade was that I bought the stock at a net price higher than where it was when I got assigned, but far lower than where it was had I bought it at the time I initiated the ratio spread (the gain on the long leg of the put spread is what reduced my cost basis).
Fast forward to today and, by looking at the chart below, you can see that the stock has given me a decent game. However, the chart now is looking iffy. On the one hand, there looks to be a very large cup-and-handle formation (bullish), while near term the stock is rolling over. Bring on the options again please: I just bought the January 2012 45 calls, sold twice as many of the 60 calls, and bought the 80 strike on top. The cost of the combo spread is $4.60. The net effect of all this is that I am now long the stock at 49.60, (versus the current market price of 49.25), I make money up to $60, and then eat into my profits between $60 and $70; above $70 I'm short up to $80, where my short risk is maxed out. Meanwhile my downside risk is limited to the $4.60 I paid for the combo spread.
Click to enlarge
I'm laying all of this out not only because I think this is a decent stock substitution trade for Baxter, but also because I would be interested in knowing how many might be interested in more of these type of structured option trades, laid out in detail in a subscription newsletter. If you could drop me a quick e-mail with your thoughts at zucchi@minyanville.com I would greatly appreciate it.
Position in BAX.
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