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SunEdison Inc (SUNE) Option Trader Gambles On Long-Term Gains

SunEdison Inc's January 2016 calls are being used to initiate a bull spread

by 5/20/2014 2:53 PM
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Option Brief: Calls are the preferred options on SunEdison Inc (NYSE:SUNE) this afternoon, outpacing puts by a nearly 9-to-1 margin. Of the roughly 12,000 calls that have crossed the tape, about two-thirds of the action has centered on two strikes, and it appears one optimistic trader is looking for SUNE to churn steadily higher over the long term.

In the early hours of the session, one block of 4,000 January 2016 20-strike calls was bought at the ask price of $4.70 apiece, while a symmetrical block of January 2016 30-strike calls was simultaneously sold at the bid price of $2.10 each, resulting in a net debit of $2.60 per pair of contracts. Implied volatility ticked higher at the lower-strike call, while volume outstrips open interest at the higher strike, two indications that new positions are being initiated.

By playing the long call spread, the moderately bullish trader is willing to sacrifice some of the reward of a sole long call by limiting her risk with the sold call. Specifically, she will begin to profit once SUNE moves above breakeven at $22.60 (bought strike plus net debit). Had the speculator simply purchased the 20-strike call outright, her at-expiration breakeven mark would be a loftier $24.70 (strike plus premium paid).

Meanwhile, in addition to reducing her breakeven level, she has also capped her maximum potential profit on the play at $7.40 per pair of contracts (difference between the two strikes less the net debit), regardless of how far north of $30 SUNE finishes at January 2016 options expiration. Gains for a straight long call are theoretically unlimited.

On the risk side, due to the premium received from the sold call, today's spread strategist has also reduced the maximum amount she could lose on the play to $2.60 from $4.70 (net debit of the long call spread versus the premium paid for the bought call), should SUNE remain south of $20 throughout the options' lifetime. At last check, SunEdison Inc (NYSE:SUNE) was sitting about 12.3% south of the $20 mark at $17.55.

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