HCA Analysis

Update 11/12/2015: I exited HCA after the position reached 59% of its potential maximum profit, eliminating time risk between now and the Dec. 19 expiration and freeing funds for other trades.

Shares rose by 9.3% over 17 days, or a +199% annual rate. The options position produced a 14.9% yield on debit, for a +3,067% annual rate.

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The health-care services company HCA Holdings Inc. (HCA), headquartered in Nashville, Tennessee, publishes earnings on Tuesday before the opening bell.

[HCA in Wikipedia]

HCA

I shall use the DEC series of options, which trades for the last time 53 days hence, on Dec. 18.

Ranges

Implied volatility stands at 41%, which is 2.7 times the VIX, a measure of volatility of the S&P 500 index. HCA’s volatility stands in the 90th percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	90.95	91.74	71.79
Lower	59.07	48.17	68.13
Gain/loss	15.6%	31.1%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

I'm structuring the position as bearish based on analyst expectations. Earnings announcements over the past year have been likely to produce declines.

Bear call spread, short the $72.50 calls and long the $75 calls,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money

DEC	Strike	OTM
	72.5	63%

The premium is $0.85, which is 34% of the width of the position’s wings. The stock at the time of entry was priced at $69.80.

The risk/reward ratio is 1.9:1.

The strike price is $2.70 above the market price. The biggest immediate move after each of the past four earnings announcements was $1.83, and the average was $1.01.

Decision for My Account

I've opened a position on HCA as described above.

-- Tim Bovee, Portland, Oregon, Oct. 26, 2015

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



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Based on a work at www.timbovee.com.