I have an Earnings trade on for $SONC that involves an initial Options component and a subsequent hedge with long stock in after hours trading. The topic of this post is the trading process itself — and why hedging with stock is always an important potential step.
Here are my messages outlining the initial Options trade and the stock hedge:
I considered selling the January 20 Straddle but did not like the cushion it was giving (range was not wide enough for me) so I elected to use the $17.5 Call & $20 Put strikes. The stock had been very weak into Earnings so I liked the near $3 range provided. At the time I did the trade price was hovering near the $19 level.
The initial reaction was an up move in price so I monitored the action after hours until I felt it was prudent to hedge with long stock. By going long at $19.75 I am able to lock in $.73 to next week expiration if price holds the $20 level (currently trading at $20.30 in pre-market). I will set my Stop at $19.75 on the long stock piece.
Here are a few potential next steps I can take to exit the trade:
1) Do nothing, let the stock get called away next week if it remains above $20. The gain would be $.73 (the Option premium collected minus the difference between $17.50 and $19.75). The short Puts would expire worthless next week
2) I could adjust the short $17.50 Calls up to $20 (thus making a short Straddle). This would eat up a chunk of the Option premium collected but the short Calls would then be above the long stock entry point (OTM). If price held above the $20 level at expiration next week I would keep the remaining Option premium as profit. I could then sell the stock to close the trade or sell Option premium against the long stock again to increase the overall gain potential
3) I could close the trade now