We talk a lot around here about taking half off the table either when our position doubles in value or we hit a key price target.
It's a great position management practice that increases our win rate while leaving us with partial positions to participate in truly outstanding runs.
But we haven't talked much about alternative ways to "take half."
What if we can take half of our directional risk off the table while leveraging gamma to keep the majority of our open profits in the case of a market reversal, and participate almost fully in a truly massive breakout?
Sounds nice, right?
A situation like this is presenting itself in our current open position in $CM Dec 55 calls. We entered this position in August and now our in-the-money calls are approaching expiration on December 20th.
Here's the chart:
Normally, I would simply trail a tight stop loss in trades like this heading into expiration. In fact, I wrote about doing exactly that in this trade earlier this week.
But then someone in the All Star Options chat room mentioned that $CM had an earnings announcement coming up before the opening this Thursday (tomorrow). This very important nugget slipped my radar. Community for the win!!
This new piece of information has the potential to either launch this stock further higher, or end our run dead in its tracks. I decided I needed to take action.
I want the potential to continue participating on any upside resolution, but I don't want to give back too much of my hard fought-for gains right as the clock is expiring.
Enter: the vertical roll.
Here's the Play:
Yesterday, I rolled my December 55 calls to the December 65 calls strike for a $6.80 net credit. This adjustment was mentioned in our chat room. That same trade can be done right now for an $8.00 credit. Bully for those who may have waited.
This accomplishes numerous benefits:
That $6.80 (or $8.00) credit I received for the roll nets against the $1.05 I paid for the position back in August. That locked in a better than 6-to-1 reward to risk for the trade. I'm already a guaranteed winner, no matter what.
By shifting my long strike to Dec 65 calls, the most I can lose of my open profits is the cost of these calls (currently priced at about 90-cents per contract.) But remember, I've already locked in at least a $5.75 profit.
These new long calls are long gamma. If the stock reverses and goes lower, I'll lose less and less the further it goes (until they are eventually worth zero). But if the stock rips higher following earnings, these calls with an approximately 40 delta will rapidly approach 100-delta as the stock moves further in my favor. And if it moves far enough, I'll be earning dollar-for-dollar as if I never did the roll in the first place!
Similar upside, and way less downside!
Now I'm positioned to sit back and watch the results of the post-earnings reaction with profits already safely tucked in my pocket, but a rooting interest in higher prices. That's a position of strength.
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: 323-421-7910.
Sean McLaughlin | Chief Options Strategist, All Star Charts
