A trade review in Rockwell Medical

I received several inquiries this week on the current trade that I have in $RMTI and I thought I would walk you through what the trade is – and where it currently stands. Here is the entry from my Journal that I posted yesterday in the Position Updates:

1 of 2 stocks in my 50% abv 50 SMA scan; new L entry at 10.25; StO Nov 10 Straddle for 3.65 credit on 9/16; BtO Oct 9 Puts for .37 (2x size) on 9/16

To start off, this stock is just one of 2 that hit a scan I do looking for stocks that are REALLY extended above the 50 Simple Moving Average. The majority of the time these are a “to fade” play (I short them).

In this case, I liked the premium that I saw in the November Option chain so I elected to do this trade:

  • I am long stock at $10.25
  • I am short the November 10 Straddle for a $3.65 credit
  • I then used some of that credit to Buy to Open the October 9 Puts (2x size). This creates a Short November/October 10/9 Diagonal Put Calendar and leaves me a Full size of the 9 Puts uncapped. This is where solid downside protection comes into play
  • I was left with a cushion of $2.91 which is quite beefy

So let’s take a look at where this trade now stands:

RMTIOh boy. It appears that the typical strategy of doing a “to fade” play was spot on but that is not what I did. The long stock position is currently down $1.30 – but the long October 9 Puts are ITM (in the money).

Let’s see how the overall trade looks now:

  • Long stock is down -$1.30 (10.25 – 8.95)
  • November 10 Calls closed at $1.05 on 9/20
  • November 10 Puts closed at $2.05 on 9/20
  • October 9 Puts closed at $.95 on 9/20

I had collected $3.65 when I sold the November Straddle so I am up $.55 on those pieces at the moment. The October 9 Puts have gained $.58 so I am up $1.16 on this piece of the trade (size is 2x).

So when you add it all up (-$1.3+$.55+$1.16) the trade is currently up $.41

Some scenarios that can play out by October expiration:

1) Stock settles in this $9 level. StC the October 9 Puts for whatever gain exists. I would likely adjust the November 10 Straddle down to the 9 strike and take in more premium (would be + to the Net on Options cushion)

2) Stock rebounds to the $10 level. The October 9 Puts would be OTM so would have no value. More decay would have occurred on the November options however. The $2.91 cushion would be the profit to work with at that point

3) Stock falls to $8 level. The October 9 Puts would have capped the Short 10 Puts from November and would have significant value for the uncapped piece which I would sell to add to the existing Option cushion. I would likely adjust the short November Straddle down to the $9 strike to take in a lot more premium

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