I’m experimenting with a relatively conservative system of selling put vertical spreads for income, and I wrote up one such trade for SeekingAlpha yesterday. Here are a few key excerpts:
One of the stocks getting hammered in this week’s sell-off is United Theraputics (UTHR)…. The stock is oversold on the daily chart and sporting an implied volatility of 81% for July options. Current share price is in the support range from the November/December 2010 consolidation.
The July 45/50 put spread is currently selling for a net credit of about $1.30. The resulting risk/reward ratio is 35%. This trade has a 75% probability of profit, and a 72% chance of expiring worthless, based on current implied volatility.
The price for this trade has already come down a bit since yesterday, but it still might be possible to get a credit of $1.20 to $1.25. For full details regarding the rationale for this trade, see “United Therapeutics: Oversold but Fundamentally Sound” on SeekingAlpha.
Note that because this is a Bonus Trade, anyone who chooses to follow it does so at peril of severe injury or death—I won’t be there to save you. But seriously, there will be no follow-up, and traders are strongly advised to have a risk-management plan in place before making this (or any) trade.
Also note that the big driver behind UTHR options’ sky-high July implied volatility is anticipation of clinical-trial results being announced before expiration. Be sure to read the discussion in the “Comments” section below the article for more information and analysis.