[Options] It's a Marathon, Not a Sprint!
Marathon Petroleum first caught our attention when we noticed a large buyer of April 14th 65 calls on the offer. We highlighted this observation in our latest Follow the Flow report. When we see this kind of activity, our next step is to check out the technical picture of the stock.
A quick look at this chart shows us that while the trend has been decidedly higher since the March 2020 bottom, there is clearly some work to do bust through the 3-year highs around $68.50 per share. Does somebody know something?
We're making the bet that $MPC is about to breakthrough. And one of the catalysts that might get us there is an upcoming earnings release scheduled for February 2nd. The buyer of those April 65 calls will be well-positioned if that takes place.
Now, that's more than a month away. And with that knowledge, it's entirely possible MPC trades in a holding pattern until then. But one thing we can usually count on as we approach earnings is that options implied volatility tends to rise, boosting options premiums.
So how can we position ourselves bullishly, get paid to wait if we must, and benefit from a potential rise in options premiums? Enter: The Bullish Call Calendar Spread.
Here's the Play:
We're buying an $MPC Feb/Apr 70 Call Calendar Spread for around a $1.10 debit. This means we'll be short the February 70 calls and long an equal amount of April 70 calls for a net debit. This debit represents the most we can lose.
The PnL curve for this trade looks like this:
As you can see, if $MPC moves up towards our strikes ($70 per share), our position moves more into the "profit zone" of this structure. When that happens, the theta in the position increases and we get paid to wait it out. As we approach February expiration, the purple line above -- which represents open PnL today over a range of prices on the x-axis -- will rise and begin to converge with the blue line.
Additionally, because we're long the further-dated April 70 calls, any rise in implied volatility will boost the premiums in the long calls more than the February calls which are closer to expiration. This will result in a net rise in the value of the spread. And with earnings on the horizon, rising premiums is something we can expect.
Our plan for managing this trade is as follows:
- Any $MPC close below $60 per share invalidates our bullish thesis for this trade and I'll look to close the entire trade down for whatever I can salvage.
- If $MPC trades up to or above $70 per share (our strike price) BEFORE February expiration of the short calls, then I'll close the trade down for a profit. The amount of profit will depend on when this move happens -- the closer to Feb expiration, the better. We don't want to be holding any longer if $MPC is above $70 because you can see in the image above that the trade structure loses expected profitability north of $70 as long as we're still holding the short calls.
- If $MPC doesn't hit $70 before February expiration, then our short calls will expire worthless (a good thing), and then we'll be left with just the long April 70 calls with two more months to play. This puts us in position for the possibility of unlimited gains if the $MPC move materializes as we expect it will.
ASO subscribers who have any questions on this trade, please send them here.
P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7991.