So here are a few of the things that I learned from this trade:
1) When I initially did my analysis I only modeled the expected 11.6% move priced into the options. Based on that analysis I was only expecting a possible lost at most $250 on the 10 iron condors that I sold.
Take Away --> When performing analysis, I need to model moves outside of the expected range.
2) On the day after earnings I saw a news come across that Netflix had a short interest of 9 days to cover, which they considered high. At an average daily volume of 1.5 million shares on a float of 54.5 million shares that equates to about a 25% short interest working backwards.
Take Away --> The short interest should be considered because earnings surprises to the upside can cause a short covering. I actually expected NFLX to beat but I had no idea what the short interest was. Did not even consider it.
3) Position sizing. Well if I would had done my analysis right I most likely would had taken on smaller size as I never intended to take on a loss of more than $200. But hindsight is always 20/20.
Lastly I did the analysis on the position repair that I am attempting. I now have a total of 5 $65 calls. I sold $70 calls towards the end of the day to cap my risk on those calls. My total maximum loss is about $1700 with the short vertical spreads in combination with my long vertical spreads. The most I can make is also $1700, which if I achieve maximum profit meaning NFLX finishes above 70 I actually make $500. My break-even price in NFLX is $69. It is currently trading at $64.5.
I'm a little confused on this one. You said your max gain was $1700, but the next sentence said you can make $500. I had another question on your max risk desire to be $200, does this mean that had the position moved against you slowly that you would have cut the position at -$200? If you have a max loss in mind, shouldn't the trade be set up accordingly so that you can't possibly lose more than $200?
ReplyDeleteThe other part of your post analysis is, well, I'm wondering how much of it is just based on that outcome. Most shares have a short interest, it's just a matter of how much. And if you don't expect a huge beat number, why would you factor a big beat or short interest in to your pre-analysis? I think this is why you set your risk level at your tolerance for pain level, this way if for any reason your analysis is different, I don't want to say wrong, but different than what you expect, then you don't have anything to worry about in the form of anxiety or second guessing.
I understand what you're saying about if there is a huge short interest and they beat, well then you can expect a short cover surge as well. So maybe another way to play that with a safety is to buy some cheaper OTM calls at the same time you put on a condor. And by OTM I'm talking outside your view of where the stock is going to trade. Those could possibly double in price and still be OTM after a huge move.
Sorry I left a few of my thoughts out of the post. Trust me it all made sense in my head. So what I meant to say is that My max gain on the 5 long call spreads that I have purchesed in an attempt to repair the position has a max profit potential of $1700. So if I were to achieve the max profit of $1700 less the max loss from the short call spreads from the Iron Condor of $1200 is a net of $500.
ReplyDeleteIn response to the max risk of $200. I got this number by modeling the expected move. So even if NFLX had moved the entire 11.5% that the options market was pricing in I would had still only had a max loss of no more of $200 based on different drops in volatility. But as I mentioned I did not model for moves outside of this range, as I not really considered a move outside of this range since the previous three plays similar to this had not. It is like you said I was guilty of having a false sense of security from past success.
Nonetheless I new that ultimatly my max loss was $1200, which I now no is more than a feasable possibility. Like you have mentioned before sometimes you have to take losses to learn lessons. I do not regret the trade as I have learned a lot and I more fully understand the position.
Besides knowing the ultimate defined risk of $1200, my perceived risk was way off.
I think you are fine to say that I was wrong. Because I was wrong. But all I am saying is with the benefit of hindsight I would had like to have known that the short interest was so high. I understand that every stock has a short interest and in most cases it is not high enough to really consider. But in the case of NFLX with a short interest of 25%, I don't think that is something that should be ignored. All I am getting at is that in the future I would at least like to know what this number is, and decide if it is "Big" enough to consider in the analysis.
You last comment is exactly the reason that I would at least like to know what the number is. That way I can have contingency planse. I like to have multiple ways to play a position.
Got it, as long as you're able to not run away and hide if you lose some money (like I've been guilty of in the past) then these relatively small losses that come with learning experiences is well worth it. Taking a paper gain in a simulation account doesn't sting, and doesn't motivate you to learn from your trade or look at other angles. I remember in detail the mistakes I've made that cost me actual money.
ReplyDeleteFrom the news feed. This position could turn out okay...
ReplyDeleteThe shares just dropped below the top of the prior bullish gap following earnings last week. The top of the gap was at $60.73 , and is now resistance. It is generally price-bearish when stocks bearishly fill bullish gaps. Support levels to watch as potential downside objectives are at $58.32 , $55.52 -- the 50-day moving average, $54.03 -- the 10-day moving average.