Tuesday, January 22, 2013

HCA is extended to the upside...whats my trade?

As I suggested in the title of this post, HCA from a technical vantage is looking very extended to the upside. Upside price movement has gone parabolic. The RSI is showing a reading of >80 and we are trading at the upper bollinger bands. So based on the chart I want to be short this name for a corrective move.

But I also want to be long the stock, I just don't feel comfortable getting long at current prices. We have decisively broken out above resistance around $34/share. And as the rule goes, what was once resistance becomes support (Around $34/share).

So I put on the following position:
Risk Profile for Aggregated Position

Part #1: Sold 1 Mar '13 $38.50/$40.50 callspread @ 51 cents

Part #2: Bought 2 Mar '13 $37.50/$36.50 putspreads @ 50 cents

Part #3: Sold 1 Mar '13 $36.50 put @$1.45

Overall I collected a net credit of 96 cents or $96.

Upside Breakeven: $39.46
Upside max loss: $104

Downside Break even: $33.54
Downside max loss: Infinite (stock could go to zero)

Max Gain: ~$300 @ $36.50 stock price

A few things to take note of from the risk profile I pasted in above. First the probability of the stock finishing above my upside breakeven of $39.46 by March expiration week is 35.49% chance, meaning there is a 64.51% probability that it will finish below my upside breakeven (I like those odds). Secondly, the probability of HCA finishing below my downside breakeven of $33.54 is 16.22%...meaning that there is an 84% chance of it

At the end of the day. If I am wrong to the upside then my max loss is $104. Anything between $33.54-$39.46 I can make $0 to $300. And anything below $33.54 gets me long the stock at $33.54, which I would be more than happy with as well. That would give me an entry of $4.46/share lower than where HCA finished today.

Lots of options and ways to play out this position. Now we just need to see what happens over time.


  1. Its been about 2 weeks or so since I put this trade on and it is right back around the price back when I put this trade on. I am up a little money on this trade and was contemplating whether I keep this position on or take it off. So I decided to check to see what the probability was that this finished ITM by March expiration. And the probability has decreased from 35.5% down to around 27%. Meaning that if I put that same trade on today the numbers suggest that I have a 63% probability of success. I still like these odds, so I am keeping the trade alive.

  2. Today HCA traded below $36/share for a period of time this morning. I put an order in to close out the short call spread piece of this position for $0.15 but did not get filled. It ultimately finished up on the day at around $36.41. This is right around my max profit price zone. But we still have 24 days to go.

  3. I booked 40% of my max profit on the back of the market finally taking a breather. If it goes deeper than today's corrective move, it could take this one with it. Just using todays move as an opportunity to get cash levels closer to 50% for new opportunities.