My goal in this exercise of following up on this trade, even though it was not taken, is for option novices to watch the evolution of the performance of spreads verses simple long options. Most times spreads can greatly enhance the profitability of a position yet many feel "it's too complicated". It's not, and it would be well worth your while to learn the nuances of spread trading. With that in mind:
It's been a couple of days since the Kirby triggered on PCLN so lets taka a look at a comparison of the trades.
Entry 6/18 6/19 6/20 6/21
PCLN 660.25 +2% +3% +1.5% -1.87%
1) +1 660 C 25.45 +25% +37% +6% -23%
2) +1 660/710 Vert. 18.00 +22% +35% +13% -15%
3) +1 66/710 1x2 Ratio sp. 10.55 +12% +31% +27% + 4%
As expected, once PCLN entered the Kirby, it quickly ran up finishing the day up 2%. The straight long call outperformed, though the vertical held its own and the ratio spread moved up adequately.
On day two PCLN's rally continued though its velocity diminished closing up 1% on the day. With that action the call was now up 37%, the Vertical kept pace in 2nd place,narrowing the gap slightly while the ratio closed the gap significantly. It is interesting to note that even though the stock was 1% closer to the short strike and the ratio is net short calls, trade #3 had a great day, closing in on the leader. Its performance was accountable mostly to the lessening of the velocity of the rise in PCLN. This is due to the tendency of volatility to fall as stocks rally and the position positive theta (time decay).
On day three, the rally in PCLN fizzled a bit, most likely just digestion, and not any indication the the stock has finished its move. However the effect on the profits of the trades was significantly different. Look at the long call, its profitability was devastated, falling from +37% to just 6%, while even the Vertical had its % profit slashed by 2/3 to 13%. The ratio spread also declined, though modestly to +27% which now firmly leads the pack, more than doubling the Verticals performance. Should today’s action in PCLN see the digestion continue with a less than 1% move, the outperformance of the ratio should expand.
PCLN failed to hold the Kirby falling 1.9% as the entire market took a major hit SPY falling 3%. If PCLN opens below the pocket tomorrow the trade should be closed. ( I bought the 1x2 very small todat PCLN at 661ish expoecting the Kirby to hold). Looking at the respective trades, the long call is the clear loser. With PCLN down less than 3% of the trades entry, the call has dropped a whopping 23%, ouch unless you were qick and took advantage of the 2 day price spike that occured immediately upon the Kirby entry. The call spread didn't fare a lot better dropping 15%, not fun. The 1x2 ratio however maintained its profitability, closing +4%. Not bad for a "losing" idea.Bear in mind that though the trade was the clear winner of the 3, and a winner despite the stock falling, the expected move did not occur. Now tomorrow may bring an opening gap up and PCLN may continue along its merry way up to 710. But trades like this, or any trade for that matter reaely act exactly as we hope, so having a position that still works even when wrong makes sleeping a lot easier.
This is not investment advice. Raymond (Randy) Reis is not a
registered investment advisor. Under no circumstances should any content from
this website or Twitter be used or interpreted as a recommendation for any
investment or trading approach to the markets. Trading and investing can be
hazardous to your wealth. Any investment decisions must in all cases be made by
the reader or by his or her registered investment advisor. This is strictly for
educational and informational purposes only. Mr. Reis may have numerous
positions within the market at any given time that are not disclosed of at the
time of publication. All opinions expressed by Mr. Reis are subject to change
without notice, and you should always obtain current information and perform the
appropriate due diligence before making any investment or trading decision.
All efforts are made to ensure that the information contained within the
site is factual and accurate - however, Mr. Reis does not guarantee its accuracy
under any circumstances.
Mr. Reis has chosen to disclose the vast majority
of his positions in the market to qualify his research. While he strives to
maintain as objective as possible, the fact that he is also an active
participant will inevitably influence his perspective.