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Khalid Radwan's  Instablog

Khalid Radwan
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I've been trading stocks and options since 2003. One of my first trades was buying aapl at 25$ (2000 shares)... I wish I had held it for 10 years!
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  • Uni-Pixel: The Short And The Long Of It

    As Humphrey B. Neil once said, "When everybody thinks alike, everyone is likely to be wrong."

    Thankfully, Neil's mantra does not apply in the slightest to a specific small cap stock with almost half the sentiment of its investors heading in one direction and the other half in the opposite direction. But sooner rather than later, this temporary stalemate will be over and the whole 10 million shares of Uni-Pixel (UNXL) will march to the beat of the same drummer and in the same direction, either upwards or downwards.

    Needless to say, UNXL is a rare anomaly. For a start its price has appreciated 400% in the last six months alone. It obstinately has 50% short interest, which means it has the potential to double, triple, quadruple or centuple in value before you could say Jack Robinson, or it may drop like a falling knife causing a serious damage en route.

    You see, I am not an insider and I have no way of knowing for sure if management will put its money where its mouth is until they actually 'show me the money' come May 13th when they report their quarterly earnings and make milestone announcements, which will be the backbone of the next price level. We may not even have to wait that long to see the stock squirt in either direction as these announcements might happen any day sooner.

    Many quality articles have been written in depth about Uni-Pixel in the last few weeks on Seeking Alpha and in an attempt to introduce something new, I'm only going to talk about a handy-dandy trading strategy that makes a perfect sense in such a yo-yo stock as UNXL, which is on the verge of a dramatic move.

    If you haven't bought the stock like me when it was trading below $6 (I actually was kicked out of the trade at $25 by the crazy volatility), then here is in my opinion the second best way to play Uni-Pixel. I know it works folks and it can make you a lot of money, whether UNXL price moves to the three digits or the one digit zone. The only catch is that the stock must be shaken out of the current price range within a few weeks. If it does not, you simply lose part or all of your money. But then we're all anticipating the moment of truth for Uni-Pixel very soon and an FDA decision-like event will make it or break it.

    Before I talk about this trading strategy, I'd like to dissect the current stock price ($30 as I write) and explain what it reflects. This price is composed of around 25% intrinsic value and around 75% hope. Based on its book value, intellectual property and preferred price and capacity license partners, the stock is priced at or around $7.5, the remaining $22.5 is simply news that has been baked into the price of the stock since last December when it started its mind-boggling ascend.

    I am personally long the stock and would love to see a three digit to UNXL's stock price by year-end, but then we know that it could take one gesture of hesitation by management to see the house of cards collapse in no time. That's not to say that if this actually happens it means the total death of Uni-Pixel's stock. All I am saying is that I don't expect UNXL to be in the $10-$40 price range within the coming few weeks. That's all.

    Now back to my trading strategy. It's actually an options strangle play whereby you buy both call and put options at the same time and in the same trade. I suggest you buy the October $40 call option currently trading around $5 and the October $20 put option currently trading around $5.50. Based on 10 contracts (1,000 shares), expect to pay $5,000 for your calls and $5,500 for your puts (minus commission). That's an $11,500 investment - of course you can choose more or fewer contracts.

    If Uni-Pixel skyrockets to $50, your call options will go to around $15 or $18 and you can sell the calls for $15,000 to $18,000 and sell your puts for a loss. But the proceeds from the calls alone will make up for the loss in the put options. And the opposite is true for the put options trade if the stock falls below $10. Your net profit in either case (based the two prices of $50 and $15) is between $3,500 and $6,500... not bad for an almost guaranteed play.

    There is only one risk to this play and that's if I am wrong in my hypothesis about the massive move of UNXL and the stock actually does trade sideways in the coming few weeks or months, the market makers will decrease the implied volatility substantially (it's above 100% currently) and we can see the prices of these option cut in half over night. Moreover, time decay will decrease the value of each option.

    This scenario is unlikely but possible, at which point you may want to sell both options for a loss before they expire worthless. That's the tax you pay for having this dual sentiment about the stock.

    I chose the expiration month of October to give you enough time to be right, but by all means you may buy other months and different strike prices if you want to be more right. For example, January 2015 would be perfect as you have almost two more years before expiration, but each leg will cost you much more than the October 2013 prices.

    Please understand that options trading carry major risks and you may lose all your capital. However, buying options is capped by the amount of money you're willing to invest.

    Disclosure: I am long UNXL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: UNXL
    Apr 15 3:05 PM | Link | 2 Comments
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