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Steven PlaceKeymaster
Trade worked out very well. Now wait for another base or pullback
Steven PlaceKeymasterBA broke out and has greatly surpassed expected targets. This has gone a bit parabolic, and the way we structured our risk, we are near max profit with around a month left. This is where you should reduce position and trail a stop.
Steven PlaceKeymasterThe breakout worked very well and the stock reached new 52 week highs.
To take some profits off the table and reduce risk, consider a technique called “spreading”
This is where you take your long call, and then sell a new call at a higher strike price. This moves your trade from a long call to a bull call spread.
Before (on 5 contracts)
After – by selling the Oct 85 call against:
This reduced delta, increases theta, and reduces max reward. From here, if ILMN pulls back, you can close out the short calls for a profit and then keep the long calls on.
Steven PlaceKeymasterAfter a single day, the straddle here really perked up and is at a profit.
The question now is, what do you do with it here?
So the trade is sitting right around a 25% return on max risk, which isn’t half bad for a short term trade.
Now if you let this trade sit, you’ll need to see further upside (very possible here). But if BIDU reverts then you lose your gains *and* expose yourself to theta risk.
There are two potential adjustments to consider.
The first is a gamma scalp. This is where you trade stock around a position. The current delta per straddle is 50, so shorting -50 shares would synthetically lock in your profits and get your delta back to flat:
The problem with this trade is that it takes up a ton of margin to short stock.
Another opportunity that would accomplish the same thing would be to roll the straddle to new strikes. This frees up cash, but increases your current theta risk.
So consider closing out the 135 straddle and opening the 140 straddle:
That way if BIDU reverts or continues to breakout, you can continue to make money.
Steven PlaceKeymasterQuick update to GS
With some reversion and time decay on the September options, the trade has moved back to breakeven. The september options now have about two weeks left to expiration.
We are now at a trkcy point where we have a lot of theta gains possible, but also with short gamma risks. If GS chops around for a week or so that’s great, but if we get trending action anytime soon then we can be in trouble. This one will be on a short leash, and any strong moves will require a close.
Steven PlaceKeymasterWe are at our first adjustment point on our SPX income trade. The goal here is to get our deltas much lower to prevent bigger losses.
Here is our current risk:
Currently at a small unrealized loss with a delta of 20. That means if the market continues lower, we could be in trouble.
We are going to do two things:
1. Roll the call side lower for a credit
2. Buy a calendar hedge
The call spread roll is going to be tricky as there is no liquidity out there– be patient on your fills.
Here is what our new risk looks like– it takes our delta from 20 to 7.
If the SPX loses 1600 we will adjust again.
Steven PlaceKeymasterWith the big selloff in the market, GS has broken support and we are now in short theta territory.
Here is the current position:
To fix the trade, we will simply do two things:
- Close out the put buy hedge
- Roll the 170 calendar to the 160 calendar.
Here is what the position risk looks like afterwards:
Steven PlaceKeymasterOur income trade in GS is doing well but it needs an adjustment to hedge against downside risk:
If GS manages to break down and run to 160, we will close close out the high calendar and roll it to 160.
Steven PlaceKeymasterZION is getting stopped out here on the gap down. 28.48 was a hard stop, and we need to close it out at our planned risk.
The lack of follow through was a major issue in ZION, after the higher high, the breakout failed and it went back to retest key support at 29.25. An adjusted stop there would have been a good idea, but the gap higher in TLT and gap lower in SPX created a very poor environment for that trade.
Steven PlaceKeymasterGLD is breaking out right here, leaving the trade with a small loss. Here is what it looks like right now:
Because September now has under 30 days left to expiration, there is no reason to try and adjust this trade to try and get back any profits. The best thing to do here is to cut losses while they are still small and move on to potential trades in October.
Steven PlaceKeymasterWith the breakout in gold, our income trade has gone to the outside of our “theta range.” To compensate for this we are going to roll the lower side of the butterfly higher and add a single extra bear call spread.
Here is our current risk
Here are the new adjustments:
This reduces the cash in this trade and gets us back to delta neutral.
If GLD pulls back we don’t have to do anything. If it continues to rip (around 133-134), then we will take profits on the long call and then adjust our spreds to get us back on the +theta side of things.
Here is the risk after:
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