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Thursday, January 25, 2007

MHP Strangle For Earnings Play

MHP is announcing earnings on Thurs BMO and I entered a strangle, Feb65 Put and Feb70 Call for a total cost of $1.25/ strangle. Note that such strategies are not my bread and better type trades. Such opportunities only occur occasionally during the earnings season.

Highlighted areas in the chart shows the stock movement after earnings in the last 3 occasions. MHP moved a minimum of about $4 within 2 days of earnings release. IV of about 20% is 5pts higher than HV of 15%. Yes, IV is higher, but still reasonable. I would have preferred a straddle, but given that the stock was trading at $68.4, a strangle would have worked out better. Ideally, I would like the stock to be trading closer to $67.5 (right in the middle of 2 strikes) so that both my calls and puts have equal chance of performing. But given that there is still 23 days more to expiration, the low cost of the strangle and the calculated max loss of $0.8 (in the event the stock didn't move and IV drop back to HV levels), I decided to go ahead with this position.

Let's see how the stock reacts tomorrow...


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