Wednesday, December 30, 2009

China Yukai (CYD) - Multi Leg Bearish Spread

CYD manufactures medium-duty diesel engines in China. The stock is trading at ~ 14.96. You can see the LIVEVOL™ Pro Summary below.

The company averages 406 option contracts a day - with an hour to go in trading it has traded over 21,000 (that's not a typo). The Company Tab snapshot is included below (click the image to enlarge).

Essentially every contract went up in a three legged option trade. The day's biggest trades and Option Tab snapshots are included below (click either image to enlarge it).

The trade was almost entirely opening (see small OI per line in snapshot above):

Sell 7005 Feb 17.5 calls @ 0.30
Buy 7005 Feb 15 puts for 1.40
Sell 7005 Feb 12.5 Puts @ 0.20

Total outlay = 7005*100*(1.40 - 0.30 - 0.20) = $630,450.
Max Gain = 7005*100*(40) + 0.30 + 0.20)= $1,120,800 when stock is 12.50 or lower.
Max Loss. = Unlimited

A payoff diagram is included below (click to enlarge the image).

The bet is that the stock goes down to 12.5. A good way to analyze an "unorthodox" multi-leg option startegy is to break it up into two trades. Here's an easy way to look at this trade:

(1) Buy the Feb 15/12.5 Put Spread
(2) Sell Feb 15 Calls to pay for it

The Charts Tab snapshot below (click to enlarge) illustrates that the stock is at/near a high and may be what chartists call "toppy."

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