Sometimes you need the Sledgehammer

There are times when the “normal” tools used in trading are not able to get the job done. Sometimes you have to bring out the Sledge to finish the job. Certainly a harder tool to use, takes a LOT more energy, but at times necessary.

With earnings trades, there are situations where you have to hedge the option trade with a position in stock (long or short). I am in such a situation now with my $EXPE earnings trade:

Trade details:

  • short the August 50 Call
  • short the September 36 Put
  • long the August 43/39 Put Spread

In after hours, the reaction to the earnings report was positive and the stock moved up. With price above the $50 level, I had only one action to take: go long the stock to protect the short August 50 Call. I had to bring out the Sledge and went long at 50.65 because Options don’t trade outside of market hours (one disadvantage to them).

This morning I have bought back the short August 39 Put for $.05 (part of Put Spread) leaving the long August 43 Put. I have done nothing with the short Sep 36 Put (so far away now, and protected for a while by the long Aug Put).

After doing this, I focused on what to do with the long stock & short August 50 Call piece. I elected to focus on looking for a top with this being the plan:

  • sell the long stock
  • play for a drift back down so that the short August 50 Call will shrink in value

I have in fact sold the long stock position on the 20 SMA break on the 5m chart (one of common rules to follow) near the $57 level. I use the Accumulation/Distribution indicator as my primary guide, and it is currently at a low for the day. Profit taking by the Bulls makes sense so would expect to see a bit more of that.

The August 50 Call is currently at a bid/ask of 6.50/6.80

Updated on August 9, 2012:

The only remaining piece to this trade is a long position on the August 43 Put which I expect to be worthless at expiration next Friday. This trade has a booked gain of $4.42 to this point and that is expected to be the final total.

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