Forecast came true

VRX: time to sell volatility. The stock will NOT move more higher than $49 or lower than $26.
3 may 2016

A quick preview: I wrote several posts last week about FacebookAppleBoeing and Amazon. Still waiting for an expiration of Facebook and Amazon options, but Apple and Boeing paid out really great: $1,380.00 before the broker's commissions per 1 strategy. That's what I earned within just a few days. Still waiting for Facebook and Amazon, and if FB is in the profitable zone and it's just three days left, AMZN is on top of the profitable range - will manage the risks as soon as it goes out of range. 

Coming back to VRX. I mentioned my previous posts to show you, that this strategy of selling the strangles is working out. So it's time to play a risky game now. VRX is a super volatile stock, it soars 12% today. That's why all the options are really expensive. 

Fundamentally I believe that VRX is completely comfortable with its debt, their most recent filing showed it. Actually the fact that they filed the 10K form showed it. So now the stock is moved purely by the speculations. Awath Damodaran recently wrote a post where he explained why VRX should be priced at the level of $43 (here is the article if you missed it).

So basically I think that selling the strangle will work out here as well. Deep ITM call and put gave me the following outlay:

And of course, you want to see the P&L profile:

So as you can see, we have three different ranges:

  • maximum profits: $28-$47 or 24% downside and 29% upside;
  • less profits: $26-$27 and $48-$49 or maximum 29% downside and 34% upside;
  • losses: lower than $26 or higher than $49

You may ask: why don't you want to use the OTM calls and puts? I think that the main reason is almost absolute lack of profits. So you can check the OTM puts and calls, they cost almost nothing, that's why it will be unbelievably difficult to get some return from it (I think it's almost impossible).

So that's my strategy, and of course you can hedge it with puts or calls depending on whether you think the stock will go. Share your thoughts in the comments below, let's earn on options together.

Reminder: This is a poll: AGREE if you think that VRX will stay in a range of $26-49, DISAGREE, if you think it will go beyond.

P.S. If you missed my articles:

Answered:
5 people

VRX: time to sell volatility. The stock will NOT move more higher than $49 or lower than $26.

Agreed
5 people
Disagreed
0 people