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Rolling up and out in Visa LEAPS options
Related Symbols: V
One Visa (NYSE:V) bull wound up being a pretty good math whiz earlier today, rolling up a January 2011-dated call to a higher strike in the January 2012 LEAPS series, and effectively paying nothing to do so.
Shortly before 2:00 PM Eastern time today, a trader sold 2,950 January 2011 90-strike calls for $8.30 apiece and simultaneously bought 6,800 of the January 2012 120 calls for $3.60 apiece. This worked out to be a premium neutral trade as follows:
When executing the ratio, the trader planned accordingly that no additional funds would be required, nor would any money be coming out of the trade. Given the open interest in the 2011 and 2012 calls – 4,051 and 25, respectively – it is likely that this investor was shifting existing positions that will expire in 10 months to the LEAPS series. The January 2012 options, while out-of-the-money by $30, won’t expire for nearly two years.
In the unlikely event that this Visa trader holds the position until expiration, the stock will have to rally roughly 33% between now and then to put these options in-the-money. In a losing position, a call buyer may have to part with 100% of the premium paid, but the premium for these calls appears to have been offset in its entirety by the proceeds from the sale of the January 2011 90-strike calls.
The more likely scenario is that the call buyer will hold these positions until it hits an appropriate point at which to take profits or halt losses (or roll to an even later series, when possible). Delta for the January 2012 120 call is 24%, meaning the option should increase 24 cents for every dollar move in the stock. So if Visa rallies even $10 to 100 in the next few months, the option could increase in value from $3.60 to $6.00 (adding $2.40). Of course, this is oversimplifying matters as delta changes daily and implied volatility can impact an option’s value as much or more than the underlying’s price action.
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