Arcángel de Jesús Montoya
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All posts from Arcángel de Jesús Montoya
Arcángel de Jesús Montoya in Money Trafficking,

Your Chance To Profit From Today's Horizon Pharma's Decline

The market seems to be feeding me with no-brainer high-return trades lately: my SunEdison (SUNE) trade earned me over 60% in just one week, while the most recent idea, Linn Energy (LINE), is up 50% today. As I like to say, people almost always overreact to fear. My idea of today involves Horizon Pharma Plc (HZNP), whose stock got hammered today as the company lost over a quarter of its market value in just one day, following a disappointing earnings report:

Personally, I did not find the report disappointing, at least from the financial standpoint: the company is shooting for the moon, based on all lines in the P&L. I have read some opinions stating that the crash is somehow connected to the 10-K`s section related to a subpoena received by the company`s management regarding its marketing activities. Whatever the contingent liability is, I do not think it exceeds $770M - the amount Horizon Pharma lost in its market capitalization due to the sell-off. If you are a bull like me (at least in the current special situation), here is an idea for you: sell long-term at-the-money options. My options of choice are the January 2017 contracts: 

(Source: TD Waterhouse)

Selling naked options is a bad idea, unless you actually want to risk losing many times over the premium you receive from the sale. This is especially true over a short-term period. Hence, I recommend hedging the downside risk with short-term out-of-money puts. I like the May options:

(Source: TD Waterhouse)

This particular trade - selling long-term ATM puts and buying short-term OTM puts for hedging purposes - results in a net credit balance of at least $2.40 per share (assuming you buy at the ask price and sell at the bid price). The maximum risk here is $1.00 per share (the three-dollar spread less the premium received on the sale and plus the premium paid on the short-term put) over a one-month period. Of course, if the stock falls below the $10 mark and remains there over a longer period, your margins from the trade will shrink because you would have to buy a new put option at a higher price. 

On the other hand, if the stock remains above the $13 mark (the long-term ATM options with remain at-the-money), investors will be able to roll the options' strike higher, locking profits, and/or buy farther OTM options, also saving on insurance. Keep in mind that your ATMs will become less valuable (which is a good thing) over time as time decay kicks in and/or implied volatility decreases. This means that you will be able to buy back the options at a lower price without the necessity to lock your capital over the next ten months.

Please let me know what you think about this trade.