With the Utilities SPDR ETF XLU – NYSE burning out for the past month, a sharp trader came knocking today and loudly called the bottom for Consolidated Edison ED – NYSE by selling 4,000 ED August 77.5/82.5 bull risk reversals.
A bull risk reversal means the customer sold the ED August 77.5 puts and bought the ED August 82.5 calls. In this case, he paid $0.65 per call and collected $0.70 for each put, thus netting $0.05 on the transaction.
Should ED close between $77.50 and $82.50 at expiration in August, he’ll make a mere $20,000. However, the real fireworks happen outside of the strikes. Below $77.45 (-3.7%), he’ll lose $400,000 for every dollar ED falls. And above $82.50 (+2.6%), he’ll make $400,000 for each buck the stock puts on.
Notice how the risk-to-reward proposition seems skewed to the upside? ED pays out its quarterly ex-dividend on August 15, which occurs before August expiration. On this date, ED will open $0.69 lower, so August options are pricing in this development. That is, calls are cheaper than puts.
Dividend issues aside, ED is likely to find very strong support at $77.50 and to the upside watch for shares to potentially rip through $82.50.
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