As part of our HT Premium service, just about every trade we enter into will have a trade write-up so you know our plan as we head into a trade. And while we typically have a bunch of different trades that we alert during the week as part of HT Premium, we'll continue to post one free trade a week for the group. Here is this week's free trade:
Trade: -10 ORPH 8/20 5p for a $0.71 credit
Category: IV Reversion
Minimum Collateral to Enter: $165 ($429 fully cash secured)
Max profit: $710 | RoR: 16.55% | Collateral: $1,650 | RoC: 43.03% | Cushion: 14.20%
A ticker that we've had a bunch of success with so far this year, ORPH saw another large, random spike today. This has almost all of the aspects that we like to look for in an IV Reversion trade. For reference (and since I haven't made a video about it yet), those are:
(1) a huge spike in price and IV
(2) good news that causes the strike
(3) a solid pre-spike trading base
(4) a breakeven price near the previous trading base
Let's take a look at the chart for ORPH and see which criteria it meets:
It checks the box for criteria #1, which is a huge spike that causes a surge in IV. There wasn't any particular news to cause this spike though so it doesn't check the box for point #2. We've had this one on our watchlist for a while though so we knew that the $4-5 range was a decent place to have a breakeven price. Selling these 5p gave us a $4.29 breakeven price, which is juuuuust above the red line (because I did a bad job drawing it). Point being, it lines up perfectly with the lows on the 1 month chart shown above so even if the spike wears off we can still expect ORPH to remain above our breakeven price.
That leaves only point #3 to consider, which is a solid trading base. The 1-month chart shown above doesn't do a great job of illustrating it so let's take a look at the 1-year chart for ORPH:
As you can see, the red line we've drawn looks a LOT better in the context of the 1y chart. So often with stocks like this you'll see a roller coaster of a chart over the past year or so. That's not really the case here as ORPH had decent support in the $5 area, which represents our max profit point on this trade.
So while it doesn't hit all 4 points we look for in an IV reversion trade, it hits 3 of them really solidly and it's a stock that we're familiar with typical price action on. We've already made profit on a similar setup earlier this year and hopefully will be able to accomplish the same here.
The plan: Since this trade expires on Aug. 20, it has a life of 7 trading days. If ORPH can level off and kill the IV I expect the options to get crushed. I would be happy to take about 60% of max profit this week which means I'll be targeting a closing price of roughly $0.30 if I can get it this week. If not, no worries. The $4.29 breakeven means we can handle a pretty big drop in the upcoming week before we start to lose any money.