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It's a sluggish day in BlackBerry Ltd's (NASDAQ:BBRY) options pits, with volume at 77% of its normal level. Much of that can be traced to a single transaction, as well -- namely, a 9,000-contract short straddle, equally split between the mobile phone maker's September 10.50 calls and puts.
Getting into the details, we noticed a block of 4,500 calls traded at the bid price of $0.22 each, indicating they were written. At the same time, an identically sized block of puts traded below the bid price, at $0.30 each. Because volume at both strikes outstrips open interest, it's likely the lots were sold to open for a total net credit of $0.52 per pair of contracts.
Essentially, this trader is banking on minimum volatility in BBRY shares through the end of this week, when the front-month options expire. In order for the speculator to maximize his profits at the closing bell Friday, the stock needs to be sitting exactly at $10.50 -- in which case, he'll pocket the entirety of the premium collected.
On the other hand, if BBRY makes a significant move up or down, the option writer could be in trouble. Should the shares move below the downside breakeven point of $9.98 (strike price less total net credit), or above the upside breakeven point of $11.02 (strike price plus total net credit), the trader's losses will begin to accumulate. Whereas potential downside losses are capped at $9.98 (if the stock hits zero), potential upside losses are theoretically infinite, as they're pegged to the price of the underlying.
Currently, BlackBerry Ltd (NASDAQ:BBRY) is sitting at $10.25. For the majority of the past week, the shares have traded in a tight window, as traders digest the latest buyout rumors -- possibly the driver behind today's short straddle. The security's 30-day, at-the-money implied volatility (IV) was last seen down 2.6 percentage points, or 3.2%, at 78.4%.
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