Trade Update – $HLF : Closing Feb / Mar Put Spread for Gain

by Dan February 7, 2013 10:07 am • Commentary

Since entering the HLF Feb / Mar 40 Put Spread almost 2 weeks ago, HLF stock has been on a wild ride, having sold off some 33% and then rebounding 20% since.   With the stock getting back towards my break-even, the trade has become profitable and I am going to close the position and look for ways to express a short view on the next pop above 40, with defined risk of course.

Action: Sold to Close HLF ($36.75) Feb / March 40 Put Spread at 2.00 for a .50 gain

 

 

Original Post Jan 25th, 2013:  New Trade – $HLF : The Awkward Kid Always Attracts Hedgies

Here’s a preview of what I’ll be discussing on Options Action, tonight at 5pm ET

Event: Carl Icahn and Bill Ackman went at eachother on CNBC this afternoon. In case you missed it, here’s the video. Good TV!:



The obvious takeaway from this segment is that this story or these guys aren’t going away anytime soon. And the stock and especially the options will have the chance to remain crazy, especially with an earnings report on the horizon. I’ve also thought through this whole thing that Ackman has been making the better argument all along. So let’s look at trades…

Volatility: Implied Vol is up today but is down significantly from what we saw when the battles between the hedge funds began. IV across all months sits at around 60, down from a high of 140 (red). The actual volatility (blue) of the stock remains elevated as the stock continues to move suddenly intra-day on any sort of rumor or stock imbalance.

Screen Shot 2013-01-25 at 12.42.24 PM
1 Year HV30 vs IV30 from LiveVol Pro

Expect March volatility to continue to climb into the earnings event as February options expire just two days beforehand.

 

Trade: HLF ( $44.50) Buying Feb / Mar 40 Put Calendar for 1.50
  • Sold 1 Feb 40 Put at 1.20
  • Bought 1 March 40 Put for 2.70
Break-Even on Feb Expiration:
  • if stock 40 or higher feb expires worthless and I own March that catches earnings for 1.50.  I fully expect Mar vol to get bid prior to the report.  At this point I will look to spread march by creating a put spread.
  • if stock below 40 I make or lose the difference btwn the 2 options, but my max risk is 1.50


Trade Rationale: With February expiring 2 days before the earnings event, selling those options to finance March seems like a cheaper way to play in this stock. Additonally, I think March vol has probably overshot on the downside and is likely to rise steadily into the company’s report.

I am putting this trade on small and will see what happens with volatility as we approach February expiration.