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 6/22 6/25 6/26
PCLN Net Daily Change 660.25 +2% +1% -1.5% -1.5% +1.4% -2.3% +.07%
1) +1 660 C 25.45 +25% +37% +6% -23% -9% -39% -33%
2) +1 660/710 Vert. 18.00 +22% +35% +13% -15% +2% -29% -21%
3) +1 66/710 1x2 Ratio sp. 10.55 +12% +31% +27% + 4% +27% -6% +9%
6/26 trade update
PCLN staged a relief rall today, though it dropped 3 point in the last 15 minutes. Still, the gain of .07% was welcom by all three spreads. The small bounce helped the long call and the vertical recover some of their losses, but the ratio spread furthered its outperformance by pushing solidly into the black at +9%. If PCLN is unable to get back into the Kirby above 660, I will consider this trade closed and will cease following it.
6/25 trade update
Fridays trade saw PCLN drop 15.33 or 2.3% to 651.65, below the long 660 strike. Lets see how that affected the three trades we are following. With PCLN down 1.4% since the entry, all three trades are in the red. Clearly the optimum way to play this trade was to take profits on the initial spike even though price never neared the oppsing end of the Kirby at 710. Trade 3 gave a longer period of opportunity to maximize profits, right up until Fridays close. Trade 1, the long call has gotten crushed. In just over a week of holding, with just a 1.4% drop in the stock, the call has fallen a whopping 39%. A clear picture of why not spreading is usually not the opportune way to play this. Even the vertical is down a significant 29%. The ratio fared best, falling only 6% and certainly has the best chance of attaining profitability. Trade 1 however would need a greater than 6% rise in PCLN by expo, while trade 3 would need only a 3% rise. Now if PCLN had continued rallying like it did on the 1st two days of the trade, then obviously trades 1 & 2 would outperform trade 3. Trade 3 might even be negative. But a rally of that velocity is rare. One exception is a takeover situation. Because of that playing ratios trades IMHO should never be employed in any situation where there is even an inkling that the security may be a takeover candidate as that could prove disaastrous and even fatal to an account.
6/22 trade update
PCLN open back into its Kirby pocket this morning negating the need to exit the position, but it quickly fell with the market back under the support level of 560. I chose to exit at prices slightly worse than the close, a 3% profit. But in the interests of learning, lets follow this trade through its completion in case any of you had the foresight to keep it on. PCLN rallied almost 1.5% today allowing the long call position to erase much of its losses. But it still sits with a 9% loss in less than a week of holding, a week in which the stock gained $7.00 over 1%. That doesn't feel good. Caught the stock, had big gains, gave them all back and sat with a sizeable loss before a relief rally takes us to down 9%, Alka Seltzer please!
The call spread fared better posting a 2% gain as compared to a 1% gain in the stock, with much less volatility, easier to sleep at night.
And finally my favorite, the ratio call spread. This spread performed like a champ, posting a 27% gain for the week. It also was never in the red at the close of any day. And with a weekend of premium decay upon us..... I wish I didn't take it off!
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.
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