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Three-Legged Play Positions Options Trader for a RadioShack Rally

Posted on the 30 March 2011 by Phil's Stock World @philstockworld

RSH - RadioShack Corp. – A three-legged options combination play on RadioShack today signals long-term bullish sentiment on the consumer electronics goods retailer in addition to the flurry of near-term bullish call activity observed during the session on yet another bout of renewed private equity speculation. Shares in RadioShack are up 1.45% to arrive at $15.34 just before 1:00pm. One options trader looked to the January 2012 contract, selling put options in order to partially finance the purchase of a debit call spread. The trader sold 5,000 Jan. 2012 $12.5 strike put options at a premium of $0.90 each, purchased 5,000 in-the-money Jan. 2012 $15 strike calls for a premium of $2.15 per contract, and sold 5,000 calls at the higher Jan. 2012 $22.5 strike at a premium of $0.25 apiece. The net cost of the three-legged trade amounts to $1.00 per contract. Thus, the investor profits if shares in RadioShack rise another 4.3% over the current price of $15.34 to surpass the effective breakeven price of $16.00 by January expiration. Maximum potential profits of $6.50 per contract are available to the trader should shares in RSH soar 46.7% higher in the next nine months to exceed $22.50 by expiration day in 2012. Selecting the in-the-money $15 strike calls and the deep out-of-the-money $22.50 strike calls positions the investor to benefit from a massive run up in RSH shares should a buyout occur at some point ahead of expiration. Meanwhile, the sale of the $12.50 strike put options lowers the trader’s breakeven point on the upside and allows him to start making money faster if shares continue to move in his favor. The short put options do, however, indicate the trader may wind up having 500,000 shares of the underlying stock put to him at $12.50 each if the contracts land in-the-money and are exercised at expiration. Shares in RadioShack have not dipped below $12.50 since May 2009, but did top $22.50 as recently as October…


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