A look at Bear Collar protection starring my Sodastream trade

I often like to discuss a trade topic using a real live trade and thought I would highlight the current $SODA trade I have on. Here are the specifics:

  • I am short stock at $36 from 07/24 in the Swing account
  • I own an August 01 weekly $31.5 Bear Collar
  • Options Net: -$.83

Now that the Earnings event is over let’s take a look at the Daily to see where price is:

SODA

So far a nice bounce with the 50 SMA just above to offer some resistance. So how is the Bear Collar helping my position? Let’s see how the Options are priced right now:

  • The short $31.5 Puts are OTM now, last trade was $.30
  • The long $31.5 Calls are several strikes ITM now, last trade was $1.43

So the short stock piece is protected on any gain in price above $32.33 (31.5 Call strike + .83 the current Options Net). This locks in a gain of $3.67 (36 – 32.33).

 

 

50/50 Basket update

Only material change this week so far is an exit on $PBYI (hit a Stop). Current positions are:

  • $GLUU  I am short August 5.5 Puts (was part of a Bear Collar tied to stock but stock piece hit a Stop on 7/21 as noted. The long Calls were sold on 07/28)
  • $VJET  I am short stock at 26.40 with an August 20 Bear Collar

 

Note: The $PBYI position in this basket was a different trade than what is currently in my Swing account.

Under the hood – Earnings Trades prep

Whether you elect to create trades for Earnings reports or not it is important to be aware of your existing positions – and when those companies report. If you are doing a specific trade for Earnings or will be holding an existing position through the report, I recommend that you monitor Option flow in the relevant option chain to see how traders are leaning. Of course there are a variety of agendas & strategies being initiated – any skew should be noted (it’s when the Put/Call ratio is balanced that things get more difficult, indecision).

In my opinion there are a lot of benefits to having a trading process that includes a focus on Earnings trades. Here are just a few:

1) By using a process to create Earnings trades – and collecting a LOT of relevant data for a database – you will become more knowledgeable on how well/poor a company is performing vs expectations

2) You learn just how often a reaction to an Earnings report is NOT what you expected – and why a focus on Trade Design is of utmost importance

3) With the continued growth of Weekly options, you can participate in unique trade structures for very little cost (the trade-off being risk you take on). The ole Risk/Reward equation

I maintain a large database of company info that includes Earnings report information which comes from a variety of sources (including my own views/assessments). Here is a snapshot of the area where I note any Trade Idea that I like for each particular reporting company:

07282014_BMO

The 2 most common trades I do are:

If Bullish:

Risk Reversal CS (this means I would short Puts and be long a Call Spread)

Call Ratio with short Puts (or PS) – this means I am long Calls and short Calls above (2x) and short Puts or Put Spread below

If Bearish:

Risk Reversal PS (this means I would short Calls and be long a Put Spread)

Put Ratio with short Calls (or CS)  - this means I am long Puts and short Puts below (2x) and short Calls or Call Spread above

If Neutral:

Short Straddle or Strangle

Double-Banger (Long a Call Ratio and Put Ratio) – I want to Look Both Ways if I use this trade strategy

One additional thing to note here: I have as a step in the process to use stock as a hedge – and this becomes important from time to time. Any time price reaches the outer boundary of a trade (near the short Calls above or the short Puts below) that is when a hedge is utilized. For an example let’s look at $CMI from above:

The outer boundary would be: $155 above and $145 below

Position Update – 07/25/2014

A focus on Earnings trades again this week with a few normal Swing trades thrown in for good measure. Newly added this week that survive to the weekend:

  • $HLF  I own the Aug 01 weekly 55/70/55 Risk Reversal CS
  • $PBYI  I am short the Sep/Aug $230 Call Calendar
  • $PKG  I am short the August 70/65 Strangle (remaining pieces from a RRCS)
  • $SODA  I am short stock with an August 01 weekly $31.5 Bear Collar
  • $MAN  I am long the August 80/85/80 Risk Reversal Call Spread
  • $PVH  I am long the August 115/120/110 Risk Reversal Call Spread
  • $PBYI  This is a different position than the Swing account position, this one is in the 50/50 Basket: short stock at $220.35

Exits this week (including newly added this week that didn’t survive):

Here is the Summary:

Positions_07262014

An Earnings trade review in Starbucks

We are now well into Earnings season and so there will be more info from me on trades for Earnings reports. I review each trade the same – whether it is deemed a success or a fizzle – to ensure that I am complying with my overall trading process.

There are not many traders that discuss trades that are deemed a failure so I thought I would do a blog post on how the $SBUX trade has played out. Here is the trade specifics:

SBUX

  • I am Long the July 25 weekly 80/82/83 1×2 Split Call Ratio. Another way to look at this is: I am Long the 80/82 Call Spread and short the $83 Calls as well = a 1:2 Long/Short Ratio
  • I am Short the July 25 weekly $77 Puts
  • This was done for a $.14 credit
  • This trade takes margin

Now on to the Daily chart to see how $SBUX reacted:

SBUX

A nice Doji for today (indecision) as traders negotiate for a new price for the stock after the Earnings report. For my trade, I can get very little value for the Long $80 Calls right here. The other 3 pieces are trading at a penny or two.

So the result is: I don’t get much more in additional value out of the trade beyond the initial credit – and I expect all 4 pieces to expire today. Was this trade a success? Not in terms of providing additional profit no. Did it allow me to participate for the potential reward? Yes.

I would also add one more thought here: keeping the cost down to a minimum (or even being paid to put the trade on, a credit) is a key element to my trading design. I accomplished that here so maybe it was a success after all … feel free to chime in with comments below.

Managing a long-term position within wild short-term price movements

I have a position in my IRA for $KNDI and it has seen a LOT of activity over the past 2 days. Here are the specifics on the trade:

  • Long stock at $18 since 7/16
  • Short the August $20 Calls for 2.00 credit on 07/18
  • I sold the stock piece on 07/23 as it failed to hold the $20 level (very weak on SA article reaction)
  • This left me with naked short Calls

So now what is the move? Let’s review where the performance of the trade is currently:

  • $2 gain on the stock piece
  • $2 option premium collected on the short August calls

I have reviewed the Options chains this morning and have a few paths to consider:

1) Buy August $17 Calls for $2. This would create a long August 17/20 Call Spread. The $2 stock gains would be the profit no matter what happens by August expiration. This would free up the margin use on the Option trade

2) Buy the September $20 Calls for $1.40 debit. This would create a Long Sep/Aug $20 Call Calendar. There would be $.60 in Option net left so a total of $2.60 in profit could be locked in