Friday, December 28, 2007

Bull Spread Gamble

Today, I decided to gamble... I haven't really made any gambles in a while. In any case, I've been keeping my eye on SanDisk (SNDK), and I believe that while there are clearly reasons to be concerned about the flash memory pricing environment, the company is starting to trade at a price that warrants some attention.

Yes, I know the stock is making new lows, and that's what really makes all of this a bit of a gamble. It's not a big gamble size-wise, but it'll allow me to scratch my market gambling itch and also to put money where my mouth is. Details of my bet follow.

Options Spread

Long Jan 32.50 Calls (SWQAZ) @ 1.95
Short Jan 37.50 Calls (SWQAU) @ 0.30

Net Debit: 1.65

Basically, transaction fees aside, I stand to lose a maximum of $165 per contract, and I stand to gain a maximum of $335 per contract. Upon expiration, the break-even point is SNDK trading at 34.15, and I lose the maximum when SNDK trades at or below 32.50, and gain the maxium when it trades at or above 37.50. My net gain/loss in between is purely linear.

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