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Unformatted text preview: above an August 2010 trough.
On the same day, an options trader bought 3,500 puts at the January 2012 $40 strike for an average premium of
$3.77 each, sold 7,000 puts at the January 2012 $37.5 strike at an average premium of $2.83, and picked up
3,500 puts at the January $35 strike for an average premium of $2.10 each.
The strategy, known as a bearish put butterfly spread, implies an average breakeven share price of $39.79 by
expiration in January.
Maximum profits will be made if RIM shares plunge nearly 15 percent from the current price to settle at
$37.50 at expiration, according to Caitlin Duffy, options analyst at Interactive Brokers Group.
A butterfly put spread involves a bet shares will fall, but only to a specific level. One profits by selling puts at a
strike price that is between purchases at strike prices on each side, or the "wings" of the butterfly.
"Butterfly spreads on the stock suggest some options players expect RIM's losing streak to continue into next
year," she said.
Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 6 Remark
Section I.1 will provide you with the concepts so as to understand this article and
to calculate the numbers in this motivating example.
The most basic valuation method is the discounted cash flow model. Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 7 The time value of money
Initial Capital at t=0
Interest rate for one period : C0
How much is C0 worth at t=1?
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- Fall '14