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Dr. Paul Price
Dr. Paul Price
Articles (472)  | Author's Website |

InteractiveBrokers – Showing strength on a very down day.

May 14, 2010 | About:

InteractiveBrokers [NDQ:IBKR - $17.55] is up about 0.72% while virtually everything else is down today.

I’ve heard rumors that IBKR could be the target of a privatization by its founder and the price action in the calls seems to give some credence to this possibility.

January $20 and $22.50 calls have actaully traded at $1.05 and $0.45 already and with a bid/ask spread of $0.15/$0.30 on the so-far untraded January $25 calls.

The shares seem to have limited downside as they’ve already reflected some pretty poor recent quarterly results without suffering any damage.

A nice seven-month play…

Cash Outlay

Cash Inflow

Buy 1000 IBKR @ $17.55 /share


Sell 10 IBKR Dec. $17.50 calls @ $1.65 /share


Sell 10 IBKR Dec. $17.50 puts @ $1.60 /share


Net Cash Out-of-Pocket


If IBKR merely holds above $17.50 through the Dec. 18, 2010 expiration date:

· The $17.50 calls will be exercised.

· You will sell your shares for $17,500.

· The $17.50 puts will expire worthless.

· You will have no further option obligations.

· You will end up with no shares and $17,500 in cash.

This best-case scenario profit would be $17,500 - $14!2C300 = $3,200 for the 7.>5 months throug` expiration date.

$3,200/$14,300 = 22.3% cash-on-cash or about 37% annualized achieved on shares that

ü Go up.

ü Stay unchanged.

ü Hold at $17.50 or above.

What’s the risk?

If IBKR falls below $17.50 on Dec. 18, 2010:

· The $17.50 calls will expire worthless.

· The $17.50 puts will be exercised.

· You’ll be forced to buy another 1000 IBKR shares.

· You’ll need to lay out an additional $17,500 in cash.

· You’ll end up with 2000 IBKR shares.

· You’ll have no further option obligations.

What’s the break-even on the whole trade?

On the original 1000 shares it’s the $17.55 purchase price less the $1.65 call premium = $15.90 /share.

On the ‘put’ shares it’s the $17.50 strike price less the $1.60 /share put premium = $15.90 /share.

Your overall break-even would be $15.90 or (-9.4%) below the trade origination price of $17.55 /share.

Dr. Paul Price – May 14, 2010

Disclosure: Author is long IBKR shares and short IBKR options.

About the author:

Dr. Paul Price

Visit Dr. Paul Price's Website

Rating: 2.5/5 (11 votes)


GigaBubble - 5 years ago
Seen those options spreads? Market makers making money. Why be short 20 puts when you think the Fly is gonna buy?

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