Planning the trade exit in Amazon

One of the final steps in the execution of a trade is the Exit. It is a required step in recording a profit (or loss) in a trade and will be executed on:

  • movement up and stall/consolidate (if long)
  • bottoming process, start a new base (if short)

When options are involved, you are often presented with more than one path to take for an exit of the trade. However, one such path is an exit that is driven by an expiring option that must be dealt with in order to capture any gain before the expiration date.

I am in such a situation with $AMZN this week as I have the following trade from earnings after hour action last week:

  • long stock at 208.60 in A/H on 7/26/2012
  • I initiated an August 230/240 Collar on 7/27 for $.80 debit. I was able to unwind this Collar for $.30 thus keeping $.50 in premium in the same day.
  • later in the day I initiated an August 3w/Aug 235 Collar for a $3 credit. This means I sold an August 235 Call to buy an August 3w 235 Put.

This last bullet point highlights the piece of this trade that I must deal with this week – the August 3w 235 Put is set to expire on Friday so I need to get value from it. This needs to be balanced with the desire to have protection in place for the long stock position.

$AMZN is currently trading near $233 so this Put is ITM (In the Money) and is doing it’s job in protecting my long stock position. I will provide an update on any exit I perform this week via twitter.

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