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Lorillard, Inc. Diagonal Call Spread (Update)

|Includes: Lorillard, Inc. (LO)

On 12/20, following a several-week stock price decline, I increased my exposure to LO by entering into an additional diagonal call spread, by selling 5 March 75 calls, and purchasing 5 Jan 2011 70s, for a net debit of $2,800 less commissions. Max profit on this second spread is $75 per share, but because of my prior spread, my max profit on LO is between $75 and $80 at expiration.

My current LO exposure consists of long 10 Jan 2011 75s, and 5 Jan 2011 70s, and short 10 March 80s and 5 March 75s. The position in the aggregate has a substantial amount of theta (roughly 20 increasing as we near March expiration) and delta (roughly 240).

In the event LO increases to $80 per share at or above before March expiration, I will likely take some delta gains, and decrease my exposure.


Disclosure: Long LO