Some of you may have noticed that I did a different kind of trade on PCLN last week – it was a FEB/MAR double calendar with my short strikes at 200 and 230. This is a Debit and not a Credit trade and the returns, if the prices end up in the right areas, can be stellar. My intent was not to stay in the trade into earnings on 2/12 but to capture as much theta as possible between 1/19 and 2/11.
To get a good visual of what this trade looks like, please reference the TOS Risk Analysis below:
When I entered this trade on 1/19 the price was smack dab in the middle (@ $209.51) of the green ‘profit tent’ shown on the graph. This created a ‘delta neutral’ trade and would allow for maximum time premium decay and put money in my pocket each day. But alas, prices are not static and you can see that as of 1/25 the price has dropped to 202.48 and slipped to the left of center of the tent.
I was looking for a way to adjust this and bring it back to delta neutral – I needed to move the green profit tent to the left and get the price once again in the center without increasing risk or losing too much profit potential. Prior to the adjustment, my break evens were 190.21 and 246.87. I also changed my Simulated Trade Date to 2/11 in order to get a better view of where my profit would be before and after adjustment.
I knew I had to add height to the tent around the 170-190 level, get back to delta neutral and not impact the profit tent too much. Some of my choices were: long Iron Condor, Calendar Spread, a 4×4 Diagonal Spread (4 strikes apart and 4 months apart) or another Double Calendar.
I tried various scenarios of each one and settled on the Calendar Spread (-FEB/+MAR 180 Put) – the result is shown below:
Notice now the tent has 3 poles and the current price is once again smack dab in the middle. The delta at the end of this day is 4.67 – not bad. The effect that this adjustment had on my overall trade is this:
- I had to fork out $260 on top of the original $565
- My max profit (on 2/11) moved from $645.19 @ $217.83 to $551.71 @ $204.14
- My break evens (on 2/11) moved from 190.21/246.87 to 178.21/234.71
- I probably will not be able to adjust this trade again without it collapsing totally
I was motivated to make this correction today because the stock was down even though the market was up (sort of) and the sooner I did it the sooner I would collect theta. As I write this (after the close on 1/25) my PCLN position is up $65 today. The chart of PCLN below gives a another illustration of the adjustment.
The light green box is my profit zone before the adjustment and the dark green box is the profit zone after adjustment. So what are the chances the price will be at $204 the day before it gets to the black bar? Your guess is as good as mine. But, if the price moves down to the rising support of the long-term channel that I have drawn and bounces up just a tad, I will be there.
- Jeff
