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One thing I forgot to mention. We have a positive skew of about 3% on this trade, that is because QCOM releases earnings on 4/20, so although the skew gives us a better price, there is increased uncertainty associated with holding this position through earnings.
What a difference a couple of days makes. Market is now surging higher and QCOM reports earnings after close today. Still a lot of time left before May expiration for things to play out, but I am a little concerned about how quickly this is moving away from the $52.5 strike price. Still thinking this over, but I am leaning toward making an adjustment by buying stock to get rid of my negative delta's and either make my position delta neutral or slightly delta positive. Alternatively I could neutralize my delta's using options, but I am comfortable with the idea of holding QCOM stock - if it goes up that is fine, if it goes down the calendar will go up and I can always sell calls against the stock. That is the plan at the moment, but will see how things develop this morning and then make the final decision.
Don't have time to go into details, but I have made my adjustment. I added the May/July 55 call calendar (equal number), and also bought shares of stock to make my position delta positive. In addition, sole the 57.5 call expiring tomorrow on my stock to take advantage of the big move up and high IV in those options. My thesis is that the MMM is about $2.80 with the price at $54.75, so if it gaps up and my shares get called away $57.5 might be a reasonable price and I bought them all around $54.80 today. If not, I just pocket the premium and I'm okay holding the shares.
Regarding "taking it off"- I will just refer to the double calendar at the 55 and 60 strike prices. The shares/covered call/naked put were partly done to hedge this trade, but I may keep those shares well after the options expire and the need for the hedge is no longer there.
As for the calendars, a lot can happen between now and May expiration so it is too early to say what I will do. A large determinant of the success of a trade like this is for the underlying to be near the strike price at the time of expiration. If we were to stay right around where we are now, I would likely roll both positions. If we break one way or another then I may take one of them off, and roll the other one. If I were to roll from May to June though, I would need to believe that the stock will be trading near the strike price around June expiration. If things develop and I end up deciding that neither the 55 and 60 strike prices look good for June, then I would just take both off.
For the moment the trade looks good and it would be great to get some more days like today where nothing happens - unfortunately that usually doesn't happen when you want it to happen.
Had a little change of plans after looking at today's share price and the risk/profile graph. At the current price, the profit as of today is almost what it would be at expiration for the double calendars. That being the case and since there is some risk heading into FOMC tomorrow as well as all the time before May expiration, I have decided to take the profits now so will be selling my double calendars. I'll try to show it on a short video tonight.
One thing I forgot to mention. We have a positive skew of about 3% on this trade, that is because QCOM releases earnings on 4/20, so although the skew gives us a better price, there is increased uncertainty associated with holding this position through earnings.
ReplyDeleteIncreased my position by 40% today, adding the spreads for $0.79 because I find the risk/reward compelling as I pointed out in my original post.
ReplyDeleteAre you selling weeklies on this?
ReplyDeleteNo, I'm just doing the trade I described in the video.
ReplyDeleteWhat a difference a couple of days makes. Market is now surging higher and QCOM reports earnings after close today. Still a lot of time left before May expiration for things to play out, but I am a little concerned about how quickly this is moving away from the $52.5 strike price. Still thinking this over, but I am leaning toward making an adjustment by buying stock to get rid of my negative delta's and either make my position delta neutral or slightly delta positive. Alternatively I could neutralize my delta's using options, but I am comfortable with the idea of holding QCOM stock - if it goes up that is fine, if it goes down the calendar will go up and I can always sell calls against the stock. That is the plan at the moment, but will see how things develop this morning and then make the final decision.
ReplyDeleteDon't have time to go into details, but I have made my adjustment. I added the May/July 55 call calendar (equal number), and also bought shares of stock to make my position delta positive. In addition, sole the 57.5 call expiring tomorrow on my stock to take advantage of the big move up and high IV in those options. My thesis is that the MMM is about $2.80 with the price at $54.75, so if it gaps up and my shares get called away $57.5 might be a reasonable price and I bought them all around $54.80 today. If not, I just pocket the premium and I'm okay holding the shares.
ReplyDeleteHere is the adjusted position - QCOM earnings in 1 hour, should be interesting.
ReplyDeletehttp://screencast.com/t/Ghi1rnwF2Hk
Several adjustments to this trade made today. If anyone is interested I can discuss them.
ReplyDeleteIf you can do a video showing the original trade idea and needed adjustments since, I would be interested in following.
ReplyDeleteTrade update:
ReplyDeletehttp://screencast.com/t/JC7Bv5Nw4
So are you looking to take this off at the end of May expiration, or roll in to a June/July at that point?
ReplyDeleteRegarding "taking it off"- I will just refer to the double calendar at the 55 and 60 strike prices. The shares/covered call/naked put were partly done to hedge this trade, but I may keep those shares well after the options expire and the need for the hedge is no longer there.
ReplyDeleteAs for the calendars, a lot can happen between now and May expiration so it is too early to say what I will do. A large determinant of the success of a trade like this is for the underlying to be near the strike price at the time of expiration. If we were to stay right around where we are now, I would likely roll both positions. If we break one way or another then I may take one of them off, and roll the other one. If I were to roll from May to June though, I would need to believe that the stock will be trading near the strike price around June expiration. If things develop and I end up deciding that neither the 55 and 60 strike prices look good for June, then I would just take both off.
For the moment the trade looks good and it would be great to get some more days like today where nothing happens - unfortunately that usually doesn't happen when you want it to happen.
Had a little change of plans after looking at today's share price and the risk/profile graph. At the current price, the profit as of today is almost what it would be at expiration for the double calendars. That being the case and since there is some risk heading into FOMC tomorrow as well as all the time before May expiration, I have decided to take the profits now so will be selling my double calendars. I'll try to show it on a short video tonight.
ReplyDeleteTrade Update:
ReplyDeletehttp://screencast.com/t/jPjbSfQL9
Trade Update:
ReplyDeletehttp://screencast.com/t/xzU4ITBpsRI