NFLD... LEAP Covered Call Play

J

jllm03

Was searching thru my stock screener and this came up.
Looks pretty promising.
Only real drawback would be it is a low volume trader, but there is a lot of open interest in the options.
This has been listed as a STRONG BUY for the past 3 months.
Would be a candidate for a LEAP Covered call play.

Sell the NOV 15 Call and Buy the Jan 08 10 LEAP call...
For a 16% return by the Nov. exp date.

See attached

Any input?
 

Attachments

You're asking for trouble. When the front month has an IV of 170-180%, and a later month (just Mar '07, even) has an IV of 100%, there's obviously going to be a huge announcement to make or break the company soon.

I traded a similar calendar spread on POZN last June. I managed to get some of it back, but it's hard to make money on a calendar (or diagonal in your case) when a 60% move happens in one day.

Oh, and as an aside, what you're describing is not a "covered call" in any sense of the term. Your diagonal is describing a much different risk profile.
 
NFLD is expecting results from its artificial blood product called Polyheme. It's the only artificial blood product in the history of the field that made through all the way of Phase 3 studies.

This stock is bound to make a huge move either way...and the IV in the options is pricing the potential news accordingly...
 
Thanks..
I was looking at the price range on the 2 yr chart and it falls right into a rolling pattern that looks like it could be a steady money maker selling calls each month against a Jan 08 LEAP.

The 7.50 LEAP prices are about the same as the underlying stock.

Implied Vol. 75.7392 Delta 0.8832

Gamma 0.0175 Theta -0.0031

Vega 0.0290 Rho 0.0545

With the LEAP as the underlying, if it shoots past the short "15" strike the LEAP would continue to appreciate.
 
Quote from FullyArticulate:


Oh, and as an aside, what you're describing is not a "covered call" in any sense of the term. Your diagonal is describing a much different risk profile.
More...

Guess I had a bad choice in words there.
I have done a few of these in the past and rode them for up to 4 consecutive months as the longest.
Using the LEAP as a surrogate for the stock as in a covered call scenerio. You get a LEAP far out and deep enough it will track almost the same as the stock...but you don't have the capital outlay as you would if I bought the stock. LOVE LEVERAGE!
 
Quote from jllm03:

You get a LEAP far out and deep enough it will track almost the same as the stock...but you don't have the capital outlay as you would if I bought the stock.
More...
Delta is .70-ish on the leap?

I'd be worried about 2 things in this situation:

1) The stock dropping to a few bucks due to failure of their phase 3 trials.
2) The volatility getting sucked out.

Once the phase 3 results are known, the leap's IV may drop to the 20-30% range. That's going to hurt.

Maybe I'm too cautious after my POZN pain. :-)
 
Fifteen Reasons Why I like NFLD...

1. The company has a product that meets a critical unmet medical need.
2. The company has a product with a worldwide potential sales of over
$4B.
3. The company has patents on the "Holy Grail of Medicine".
4. The company has just successfully completed its landmark Phase III
trials for the FDA at 32 of the top medical centers in the US.
5. The company is expecting Fast Track approval from the FDA.
6. The US Military will buy the first production of the product for
battlefield use.
7. The product will end up on 50,000 emergency responder vehicles in
the US alone.
8. The product will save over 10,000 lives of young people in this
country annually and probably 100's of thousands worldwide.
9. The doctors behind the development of this product will likely get
the Nobel prize for Medicine.
10. The company has spent under $200M to develop their product,
Baxter Labs spent over $2B in their failed attempt.
11. Various large pharmaceutical companies are looking at NFLD as a
new product line.
12. Option Volatility is extremely high and points to $20+ over the
next few months.
13. The stock has risen from $10.5 in early Sept.
14. There are more than 6M shares of the 30M outstanding shares that
are currently short. Most of these shoted shares are now under water.
A short squeeze is iminent.
15. Send my kids to college! :-)


....Little side note I found on the GOOGLE Finance site....
 
Quote from jllm03:

5. The company is expecting Fast Track approval from the FDA.
Yeah, so was POZN.

12. Option Volatility is extremely high and points to $20+ over the
next few months.
This argument makes no sense. That's like saying, "Because people are uncertain, it must be going up". Option Volatility is pricing that a move to $20 is equally likely as a move to $6.

14. There are more than 6M shares of the 30M outstanding shares that
are currently short. Most of these shoted shares are now under water.
A short squeeze is iminent.
Or, 20% of the people are about to make a lot of money. 20% is a pretty substantial short bet.

I'm not saying NFLD is a bearish bet, all I'm saying is that these arguments (which were the only ones relevant to buying this stock now) are pretty darned weak for the bullish case.
 
Here is just another observation.
The past 6 months NFLD hs been in a somewhat of a wave pattern. (see attached).
The Low back in Mid June was the starting point that I used.
My Wave spreadsheet was pretty close on predicting the supports and resistance point. Today it is right about where it should be to complete the wave before rebounding.
Let's see if it carries thru to the next predicted range of
15.89 to 16.98.

Anyway, there is not much volume in the LEAP (Jan 08) to REALLY trade this the way I want to. It has dipped to about a point that I would buy a LEAP and wait another week to then sell the front month for the credit. But it would be nice.
I'm just going to keep watching it for now.
 

Attachments

hi you all

this is my first post here so i hope i won't bore or harm anyone

any way,
looking at the DEC 5 PUT for NFLD you see that the bid is 0.9 which is around 0.65 grater than the THEO value for this option.

if you take the DEC PUT 5/2.5 credit spread on the current bid/ask offers on the market you'll get a 0.4 credit which equal to 19% return on risk (without com.) while the delta for DEC 5 PUT being in the money is 0.05 which is a very low chance of happening (all theocratically off course)

good luck you all

Oded
 
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