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As Morgan Stanley shares step higher, options players turn moderately bullish
Related Symbols: MS
Morgan Stanley (NYSE: MS) jumped 2.4% higher on Friday, closing at $27.26, as investors began to slowly return to the financial space. Even as the stock advanced, implied volatility declined, as the February at-the-money (27-strike) straddle fell to $1.75 on Friday afternoon from Thursday’s closing price of $1.92.
In the options pits, we saw a ratio call spread, as investors bought April 24 calls and sold twice as many April 31 calls. More than 20,000 contracts traded at the April 31 strike, while 10,000 changed hands at the April 24 strike. This volume all hit the tape during the final hour of trading on Friday. Two blocks of 5,000 April-24 call contracts were bought for $3.80 per contract while two blocks of 10,000 April 31-call contracts were sold for 60 cents apiece, resulting in an overall net debit of $2.60 per spread.
The maximum potential profit for this strategy is $4.40, and can be collected if MS is trading right at 31 when April options expire. Because this is a 14% jump from current levels, it is considered a moderately bullish (rather than aggressively bullish) strategy. Maximum potential loss is limited to the net debit of $2.60 if MS moves lower, but is unlimited if MS rallies. The breakeven points for this trade are $26.60 to the downside and $35.40 to the upside.
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