HCA is extended to the upside...whats my trade?

As I suggested in the title of this post, HCA from a technical vantage is looking very extended to the upside. Upside price movement has gone parabolic. The RSI is showing a reading of >80 and we are trading at the upper bollinger bands. So based on the chart I want to be short this name for a corrective move.

But I also want to be long the stock, I just don't feel comfortable getting long at current prices. We have decisively broken out above resistance around $34/share. And as the rule goes, what was once resistance becomes support (Around $34/share).

So I put on the following position:

Risk Profile for Aggregated Position

Part #1: Sold 1 Mar '13 $38.50/$40.50 callspread @ 51 cents

Part #2: Bought 2 Mar '13 $37.50/$36.50 putspreads @ 50 cents

Part #3: Sold 1 Mar '13 $36.50 put @$1.45

Overall I collected a net credit of 96 cents or $96.

Upside Breakeven: $39.46
Upside max loss: $104

Downside Break even: $33.54
Downside max loss: Infinite (stock could go to zero)

Max Gain: ~$300 @ $36.50 stock price

A few things to take note of from the risk profile I pasted in above. First the probability of the stock finishing above my upside breakeven of $39.46 by March expiration week is 35.49% chance, meaning there is a 64.51% probability that it will finish below my upside breakeven (I like those odds). Secondly, the probability of HCA finishing below my downside breakeven of $33.54 is 16.22%...meaning that there is an 84% chance of it

At the end of the day. If I am wrong to the upside then my max loss is $104. Anything between $33.54-$39.46 I can make $0 to $300. And anything below $33.54 gets me long the stock at $33.54, which I would be more than happy with as well. That would give me an entry of $4.46/share lower than where HCA finished today.

Lots of options and ways to play out this position. Now we just need to see what happens over time.

Comments

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