Investor adulation may have gotten ahead of itself if the NXP Semiconductors (NXPI) stock chart has any say in matters. For shorter-term traders, a directionally-tilted NXPI butterfly is one attractive way to position as a bear.
A month ago, following NXPI’s surprise slashed guidance, I wrote bullishly about NXP’s long-term prospects and an options position to profit in NXPI stock, even if it moved lower.
And now? After a shot in the arm by U.S. and Chinese regulators signing off on NXP’s merger with Freescale (FSL) this past week, you’d think NXPI stock has reinvented the wheel.
Here’s a look at what’s happening with NXPI.
NXPI Stock Daily Chart
Back in early November, our technical assessment of NXPI was the earnings-driven double-bottom was bearishly trumped by a larger, complex head and shoulder pattern. Nonetheless, we were willing to move forward and offer a conservative, bullish strategy to readers.
In hindsight, a more aggressively aligned bullish strategy would have proven the best approach. NXPI stock, much to our surprise, has filled the bearish earnings gap and moved quickly past investors’ past trading errors when shares tumbled unceremoniously by about 20%.
Currently, the renewed enthusiasm for NXPI has put shares into pattern resistance as defined by the complex shoulder, 200-day simple moving average and 50% – 62% retracement zone.
The price move in NXPI is also well-overbought as defined by stochastics and NXPI stock in relation to its upper Bollinger Band. Thus, NXPI is now situated as positional short based on fading a bear market rally into pattern resistance.
NXPI Bearish Long Put Butterfly
Not wanting to risk too much given our longer-term bullish view; the NXPI December $92.50 / $87.50 / $82.50 put butterfly for up to $1.25 looks attractive to do just this.
This NXPI strategy can be easily broken down into a bearish long put NXPI December $92.50 / $87.50 vertical and a second, contrasting bullish December $87.50 / $82.50 put vertical. The two spreads’ profit maximization converges at $87.50 in NXPI stock, which is 3.6% below prices as of this writing.
If NXPI stock were to settle at $87.50 at expiration and a bit more than two weeks out, the trader would realize a max profit of $3.75, sans any slippage and commissions.
The max profit with NXPI at $87.50 is a result of the trader’s bear put spread reaching its maximum worth of $5 as the bull put spread finishes out-of-the-money and worthless. Combined, this allows for profit maximization from both embedded verticals.
With the bull spread’s credit used to lower the purchase price of the higher bear put spread; the NXPI butterfly trader is left with $5 – $1.25 = $3.75 profit at $87.50. It’s that simple!
As NXPI moves either up or down and away from the sweet spot of $87.50, the trader makes less profit and eventually has a capped loss of $1.25 above $92.50 or below $82.50. This is a cheap dollar strategy which also maintains a nice-size profit range from $83.75 – $91.25 in NXPI stock, so there must be a catch, right?
There is.
The big drawback for this NXPI butterfly or any long butterfly spread is that the position won’t deliver profits approaching the maximum value right up until the very last couple hours at expiration. The reason is the butterfly’s countering verticals make incremental and interim profits that are slow to be realized.
Bottom line: If a bearish trader accepts the obvious benefits and more modest shortcomings of this directionally positioned butterfly, it’s a spread to consider in lieu of shorting NXPI stock — even in the face of fellow Apple (AAPL) supplier Avago Technologies’ (AVGO) earnings beat Wednesday evening.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT
