We don’t have this trade on anymore because we were doubled up with trades in the name (read history below) and closed it for a small profit, but our plan was to paper trade out of this for the benefit of our readers.
With QCOM around 62 this Dec/Jan calendar can be closed for about 1.40 and probably should at this point. A little more can be squeezed out of it if the stock goes to 62.50 today, but it is equally at risk of losing if the stock goes the other way. There is only 5-10c left of premium in the Dec line, meaning the position is basically a long Jan call at this point. Best to take the money and run.
On Friday we placed two trades on the site in QCOM, the first was a Dec/Jan 62,5 call calendar, the second was a Jan 62.5/65 Call spread. Dan took off the call calendar yesterday and recently sold out half of the Jan call spread, both for profits. The reasoning behind this was he didn’t want to have both trades on after the stock made its initial move higher. Here I’d like to discuss the Dec / Jan13 62.50 calendar as the stock’s climb continued through the short Dec strike.
Right now, the trade that was executed for .88 is now trading about 1.15, so a decent profit but one that could have been better and one that now has a little risk of losing its profits if the stock goes higher. The move upward was a little stronger than we anticipated in such a short period of time. As it stands, the trade is now short deltas. So what to do in this situation?
The trade’s maximum profit at this point will be if the the stock comes in a little bit towards 62.5 over the next few days. Additionally, the Dec call still has about 32 cents of premium baked in. This is premium that will decay over the next few days if the stock stays here or comes in. If it continues higher the premium only helps so much as the intrinsic value of that short call increases and works against the decay.
Options One: Take the trade off for a profit, move on to another trade.
Option Two: If one thinks the rapid rise in the stock is running out of steam, the trade could be held on and will get better if the stock stays here or goes lower. Again, the best scenario is for the stock to come back towards 62.5 over the next few days. The risk is the stock keeps ripping and that not only the small profits get lost but the risk of the initial premium paid for the structure starts to erode.
Either way it’s a profitable trade and the decision on it is one of risk reward. If one was happy with the small win and is worried about the stock or the market making new highs over the next few days the prudent move it to just close it and move on. If one was looking to squeeze a little more out of it, they can wait on it. At 62.5 the trade is very profitable. Higher from here the trade is short delta bet.