A Big Money Big Bargain

Hey Traders,

It’s been a topsy-turvy week already … and it’s only Wednesday!

But even if the market can’t make up its mind …

You can always count on Big Money to be decisive.

We’ve seen plenty of unusual volume trades cross the tape this week, and each day I send a roundup of the Top 5 trades on my Big Money watchlist to my Big Money Flow members.

If you can’t get enough of Big Money (who can?!) you can click here to learn more about how my Big Money Flow members are able to exploit a Big Money loophole for big gains!

But today I want to focus on a Chinese “reopening” trade where the trader doubled-down on their bullish bet …

And knocked $860,000 off the sticker price while they were at it.

Let’s Take A Trip(.com)

Trip.com Group Ltd (Ticker: TCOM) is a Chinese multinational travel company that — shocker! — has seen better days:

Chart courtesy StockCharts

However, one Big Money trader seems to think there’s some upside in store, and they made a doubly-bullish play on the name … and managed to get in at a steep discount!

Crossing the tape Monday morning, this sizable bet on TCOM included the purchase of 4,000 contracts of the March 2022 34-strike calls for $2.30. Had these calls been purchased outright, they would have cost a pretty penny — $920,000 to be exact!

Plus, to become profitable, TCOM would have to move above $36.30. Given the long time horizon on these trades, that isn’t out of the question, but it sure does leave this trader waiting for quite a bit of upside before they start making a profit.

Next, this trader simultaneously sold the same number of contracts of the March 2022 40-strike calls for $0.85. 

This pair of call contracts forms a bull call spread — also called a call debit spread because it’s opened for a debit. 

The trader limits their profits, but reduces the cost of opening the trade. In this case, they reduced their cost basis from $2.30 down to $1.45 — still not cheap, but we’re getting there.

Now, the trader didn’t stop there. On top of their already-bullish call spread, they sold 4,000 contracts of the March 2022 25-strike puts for $1.30. 

This accomplishes a few things.

First, the combination of short puts and long calls creates a risk reversal strategy. What this does is reverse volatility skew. Because OTM puts generally have higher volatility than OTM calls (due to the greater demand for OTM puts as hedging instruments), selling the puts and buying the calls reverses the normal skew risk.

This risk reversal is a bullish play, and essentially creates a synthetic long stock position.

In addition, the premium received from selling the puts can be used to further subsidize the cost of the long calls. In this case, the $1.30 received amounts to $520,000.

When all was said and done, the long calls were essentially purchased for only $0.15, which moves their break even point from $36.30 to $34.15. 

And between the sale of the 40-strike calls and 25-strike puts, this trader has reduced the cost of their long call position from $920,000 to a mere $60,000!

Talk about getting in at a discount!

This trader is hoping that TCOM finishes as close to 40 as possible (without going over) to bring in maximum profit, which would be the difference between strikes, less the cost of the spread ($4 * 100 shares per contract * 4,000 contracts – $60,000), or a whopping $1,540,000.

Of course, should TCOM go rogue and make a sudden drastic move higher or lower (which, let’s face it, isn’t totally out of the question for a Chinese travel stock) they do stand to lose their premium paid (in the case of TCOM going above $40), or they risk an even bigger loss should TCOM move below $25.

Since this trader is clearly an institutional investor, I do expect they’ll keep a close eye and manage this trade appropriately, though.

If you want more Big Money breakdowns, I send out my Top 5 Big Money trades each trading day to my Big Money Flow members.

Click here to register at a discount!

Your Only Option,

Mark Sebastian


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