Here’s an options trading opportunity for you to check out.
Commit Criteria: United Therapeutics has a history of making some significant implied volatility (IV) increases. UTHR is announcing their earnings on Oct. 24 and with the current general market conditions we’re seeing surges in both price movement and IV. Both of these should give us some lift on their IV. Given the chaotic market conditions there is a good chance of a rapid price movement that can potentially make a significant return. Our biggest risks are a theta (time) decay of $.06/day and the risk of an IV drop in UTHR. The Vega is $.10 per percent IV so we need to watch this. Historically, UTHR’s IV rises into earnings so that should be a help.
Tactic: Buy to Open 10 Nov 2011 37.50 Calls and 10 Nov 2011 35 Puts to create a tight Strangle.
Tactical Employment:
- Buying to Open 10 UTHR Nov 2011 37.50 Calls
- Buying to Open 10 UTHR Nov 2011 35 Puts
- As a Strangle
- For a net debit of $41.50 ($415 per strangle for a total of $4150)
- Maximum Gain: Unlimited
- Maximum Loss: $41.50 ($415 per strangle for a total of $4150)
Mid-Course Guidance: We will be watching for a rise in IV as the earnings announcement approaches and any market moves that put this trade into profitability between now and the announcement date. We will be monitoring this position and sending updates to our traders.
Profitability Target: We would look to sell this Strangle @ $5.39 (30% profit).
Stop Loss (Eject level): We would look to eject if the Strangle declined to $3.12 (28% loss)
Time Period Exit: Do not hold this trade past 10/21/2011. The collapse in IV from the earnings announcement will cause a loss.
Exit strategy:
- Sell to Close 10 UTHR Nov 2011 37.50 Calls
- Sell to Close 10 UTHR Nov 2011 35 Puts
Firing Line:
If we maintain discipline on the stop loss criteria this trade should be limited to a loss of $1030 over the time period we are trading. Do not keep this trade over the actual earnings announcement. This will result in a rapid drop in IV and a high probability of a loss.
See the TheStreet.com for the entire article
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