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A Credit Spread on Edwards LifeSciences (EW)

Published on April 14, 2010

A Credit Spread on Edwards LifeSciences (EW)

April 14, 2010

Edwards Lifesciences Corp (EW) announced stock split which is Payable n May 27, 2010 (x date May 28, 2010). I earlier shared (for free) a credit spread on Silgan Holdings (SLGN) that we closed for +39.% gains.

EW is another stock that fits my criteria for playing stock split. For those who don’t know about Edward LifeSciences, here is 2 line intro from Yahoo finance-

Edwards Lifesciences Corporation provides products and technologies designed to treat advanced cardiovascular diseases. It offers products and technologies for heart valve therapy, critical care, cardiac surgery systems, and vascular diseases.

The Basic concept is that good “quality” stocks usually trends up leading into the split day and it is so because many investors/traders think that stock split is a sign of confidence; and since majority follows it, it also serves as a self-fulfilling prophecy. Of course not all the stocks that announce split goes up, so one has to be selective in choosing to play this “potential uptrend” that might last for a few weeks. I personally think EW rightly fits with the strategy.

EW Credit Spread

Even though it is a directional trade, I prefer to limit my risk exposure. There are multiple ways to open a bullish directional spread such as Bullish Diagonal, Out of the Money Butterfly, Out of the money calendar spread, etc. For EW, in the present scenario, I prefer a Bull put vertical credit spread to play this potential uptrend. I am personally of the opinion to sell to open a May 100/95 Bull Put Vertical spread. As of yesterday close, this spread will bring $1.25 credit and thus $3.75 on Margin. By May’10 expiration, if EW stays above $100, it may generate 33.3% returns. The Breakeven for this trade will be $98.75 (=$100-$1.25) below which the trade will start to lose money and will lose 100% by May expiration if either a) it is not adjusted or b) not taken off for a loss. I usually prefer to book profit/loss at 15-18%.

One key watchout, EW will be announcing earnings on April 20 after market close. If you are not comfortable going into earning with a directional trade, pls don’t follow this trade.

Disclaimer– As of this writing, I don’t have any positions in EW, but I may open anytime. I may open either any of the strategies discussed above or a different one. I may also change my opinion anytime. Pls do proper due diligence before investing even a single $.

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