UTEK Got Hammered On Friday…Here’s An Options Setup For Monday
maker of laser systems for the manufacturing of semiconductors, got hammered
Friday morning Merrill Lynch cut the stock from buy to neutral, citing growing
concern over the company’s ability to turn orders and shipments into revenue.
The stock gapped lower on Fridayâ€™s open by over 13%, and set up one of my
favorite â€œnot likely to go zoneâ€ trades, with the call options implied
volatility trading well above statistical volatility, offering some larger than
normal premiums for selling.
Figure 1 shows the gap open at 18.00, from a previous close just shy of 21,
which is a nice set up since the stock broke a strong up channel by gapping well
below its 50-day moving average (not shown).
Figure 1 – Created using
OptionVue 5 Options Analysis Software.
This type of chart setup and option volatility condition lends itself to a net
selling approach. Here I am looking at a November 20 x 22.5 call credit spread (aka
bear call spread), which is going for $50. The trade has $225 in maximum risk,
with upside breakeven is at 20.50, and no downside risk. While upside loss is
limited, the best way to manage this time-value decay trade is to exit if one of
the following conditions occur:
1. The premium you collected doubles
2. The stock price touches the short leg
As you can see from Figure 2, if the underlying were to move directly to the
short strike, you would experience about a $75 loss on the trade, which is
certainly manageable. It is essential, however, to trade a large basket of these
types of trades to diversify risk. You need to make sure they are dispersed in a
mix of industry groups, as well.
Figure 2 – Created using
OptionVue 5 Options Analysis
The legs of this spread are contained in Figure 3, showing that we would collect
$95 for the November 20 call and pay $45 for the November 22.5 call. This leaves
us with a net credit of $50, which if profitable, would yield a rate or return
of +22.2% during a period of 92 calendar days, or an annualized rate of return
of +88% (not including commissions, slippage and fees).
UTEK Bear Call Spread Prices
UTEK Bear Call Spread Premium
Sell November 20 Call +$95
Buy November 22.5 Call -$45
Net Credit/Debit +$50
Remember to always have a trading plan, and to trade that plan smartly.
John F. Summa is Founder and President of
and a registered Commodity Trading Advisor (CTA) with the National Futures
Association (NFA). Founded in 1998, OptionsNerd.com offers trading
seminars and tutorials to options traders, futures and option trading
advisories and managed futures and options CTA account services.
Summa’s trading articles have appeared in Technical Analysis of Stocks &
Commodities magazine, as well as Active Trader Magazine, Options Trader
Magazine, Futures Magazine, Stock, Futures & Options Magazine, and Investopedia.com. He coauthored
Options on Futures: New
Trading Strategies and Options on Futures Workbook (John Wiley & Sons, 2001) and more recently wrote the groundbreaking
Against The Crowd: Profiting From Fear and Greed in Stock, Futures and
Options Markets (John Wiley & Sons,
2004), which includes Mr. Summa’s innovative quantitative bear and bull
news-flow Contrarian indicator. Mr. Summa is a PhD-trained economist
and operates a
delta-neutral options trading CTA program.
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