In this article I wrote about an extreme case in volatility. This piece discusses another “interesting opportunity” available only to option traders.
Ticker NVAX is the symbol for a company called Novovax. I know absolutely nothing about the company. But I know opportunity when I see it. Fortunately, I also recognize risk when I see it. What follows is NOT a “recommended” trade, just an example of a unique opportunity available to traders who know where to look.
The Trade
The strategy is referred to as a Modidor, which essentially stands for “modified condor”. The trade involves selling an out-of-the-money call and an out-of-the money put and also buying a further out-of-the-money call and a further out-of-the-money put. The trick is that the difference between the strike prices of the two calls and the puts are different AND the distance between the stock price and the short options is different. Rather than attempting to explain let’s just go to the example.
The trade involves:
*Buying 1 NVAX Mar20 15 call @ $0.45
*Selling 1 NVAX Mar20 14 call @ $0.52
*Selling 1 NVAX Mar20 7 put @ $1.52
*Buying 1 NVAX Mar20 2 put @ $0.05
Figure 1 displays the particulars and Figure 2 displays the risk curves.
Figure 1 – NVAX Modidor Particulars(Courtesy www.OptionsAnalysis.com)
Figure 2 – NVAX Modidor risk curves (Courtesy www.OptionsAnalysis.com)
With NVAX trading at $7.89 a share, things to note:
*The cost to enter the trade (and the maximum risk) is $346
*The maximum loss of -$346 would only occur if NVAX is at $2 a share or below on March 20
*The breakeven price for the trade is $5.46 a share (in other words, as long as the stock does ANYTHING better than falling -31% in the next 36 days the trade shows a profit. That being said, this is extremely volatile stock and such a decline would not be unusual, i.e., this is a speculative trade, period, full stop).
*The maximum profit is $154 (44.5% of capital risked) and would accrue if NVAX is between $7 and $14 a share on March 20
*If NVAX rises above $15 a share the maximum profit is roughly $54 (16% of capital risked).
Summary
Is this a “good trade”? That’s not for me to say. On paper it looks pretty good, but this is wildly volatile stock AND these are very thinly traded options.
Getting filled at favorable prices on the way in would require the use of limit orders. And getting filled at favorable prices if one decides to exit prior to expiration could also be challenging.
But like the title says, “opportunity is where you find it.”
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented does not represent the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
