We opened three trades with a very similar thesis today so we'll consolidate them all into one post. Here they are:
Trade: -10 ORPH 8/20 5p for a $0.71 credit
Category: IV Reversion
Minimum Collateral to Enter: $165
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.
Trade: -50 ZEV 8/20 7.5p for a $0.20 credit
Category: IV Reversion
Minimum Collateral to Enter: $240
Max profit: $1,000 | RoR: 2.74% | Collateral: $12,000 | RoC: 43.03% | Cushion: 31.3%
Similar idea, let's start this one off by looking at the chart:
So we see a big spike in price/IV and a somewhat steady base before the spike. This one is a little different from ORPH though because the spike was due to positive news that the company was involved in a Berkshire Hathaway-backed deal.
So why do we look for a good trading base pre-spike and good news causing a spike? The basic idea is that this company was trading for $6.50-7 before the spike. We can think of that as the previous value of the company. When good news comes out the value of the company should increase. So being able to find a trade with a breakeven price near the previous trading base should theoretically put our basis below the new value of the company and a theoretical price floor if it starts dipping back down.
While our $7.30 basis may not be quiiiite into that $6.50-7 range like we would have liked, it's probably at least down near a level that we could consider to be below the "new value" of the company as discussed above. So even though we're not dead on point #4 in the IV reversion strategy like we were with ORPH, this stock has an aspect of good news that ORPH did not have. For that reason we like the trade.
Plan: We're going to hold this one and aim to exit for less than a $0.05 debit
Trade: -30 FULC 8/20 10p for a $0.42 credit
Category: IV Reversion
Minimum Collateral to Enter: $100
Max profit: $1,260 | RoR: 4.38% | Collateral: $3,000 | RoC: 42% | Cushion: 46.67%
Once again, leading off with the chart here:
The red line is plotted at $9.58, which is our breakeven price for this trade. And while the price of FULC did dip below that down into the $8-ish range in the past month, this is another one where the breakeven price looks much better if we back it up to the 180-day chart:
This company just announced earnings and had positive trial data so this is another ticker that checks the "good news" box for evaluation of a solid IV reversion trade. Important to keep in mind here that the stock will quite literally need to drop 46.67% in the next 7 trading days for us to lose any money on this trade at all.
IV is through the roof and our hope is that if it does start to fall back down we'll see some support in the $12-14 range, which you can see was a range that it traded in back between November 2020 and April 2021.
Plan: After such a big move, this is the play of the 3 with the highest IV so we would think the IV on here would be crushed the fastest. I would be happy to exit for a $0.15 debit this week. If not, perfectly happy to take the trade into next week and let it play out until expiry.