[Options] Entering Software on a Pullback
One of my favorite setups JC mentioned was this chart in Twilio $TWLO:
Strong stock, experiencing a breakout with plenty of room left to the ASC upside target of $350/per share, and it's offering us a nice pullback to enter into.
Options prices in $TWLO (as reflected in implied volatility) are pretty cheap here. However, due to the absolute share price of this expensive stock, the options are similarly expensive in dollar terms. So to reduce my cost of participation, I'll be playing this stock with a call vertical spread.
Here's the Play:
I like a $TWLO January 250/300 Bull Call Spread for $17.50 or cheaper. This means I'll be long the 250 calls and short an equal amount of 300 calls. This is a defined risk spread and the debit I pay to enter this trade is the most I can lose if the trend we're looking for doesn't materialize.
My best practice on managing profits in a Bull Call Spread is to sell it when I can capture approximately 50% of the maximum available profit in the trade. Those most a Bull Call Spread can be worth is the distance between the strikes -- in this case $50. If I pay $17.50, then the most I can profit is $32.50 (50-17.50). So, when I can sell this spread for $33.75, that would represent my target profit level. I'm willing to exit at 50% because holding a profitable trade all the way to expiration can be a risky proposition. I don't want to give the market any time to change it's mind and take my open profits away from me. This keeps me out of trouble over the long run.
On the risk management side, while my risk is defined (most I can lose is $17.50 on the spread), I'd rather not take the full loss if I can help it. As such, if $TWLO closes below $235 per share at any time during my hold, I'll look to close the spread and salvage whatever I can.
If you have any questions on this trade, please send them here.
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