Hey All, we are back for another go at the Rookie Blog. We have been following our Diagonal trade on CROX for the last few weeks and there has been some movement in the direction of the trade and we are going to tackle what that means in the blog this week.
First, a recap of last week. We talked about the different emotional states we may find ourselves in depending on what happen in the trade. These emotional states are pretty much the same for every trade but I felt like it was good to know what might come up depending on how this trade plays out. It is always a good idea to know what might happen so that you are able to keep you emotions in check and not make mistakes in managing this trade that could cost you money! As luck would have it we got a move in the wrong direction on this trade and this is giving us an opporunity to deal with the toughest emotion in trading which is fear. We talked about the euphoria of winning, the utter boredom of watching time tick by and then finally the fear of the trade going against us. This week we got what’s behind door number 3. CROX pulled back this past week and this has changed the position we are in and the only question we have left is what do we do about it?
First, let’s take a look at the chart to get up to speed.
As you can see CROX pulled back pretty significantly last week. This took our initial trade from in a small winning position to a negative position currently which you will see in this week’s video. When you first look at this it could send a shockwave through you and cause that emotion that we spoke about before. However, there is a couple of silver linings here that are inherent with this type of trade. Our trade is made up of two parts, one short and one long. When the trade goes our way, the long part of the position rises in value which is exactly what happened the first week we were in the trade. The short part of the position loses in value as the position moves in our favor, however because of the lower delta of the short position the damage is less than the gain for the long position. This results in the positive trade balance we saw in the first week. Now, we arrive at today and we find that the direction went against us and not the position has flipped and the long option is lower in value and the short option is higher in value, but again because the shorter term option has a lower delta then the benefit is not as great as the long one and therefore we have a negative balance. The silver linings here are that even though the trade in going against our direction we are collecting time value from the short dated option and this is really the premise of the trade. We can be wrong and still be right, kinda. The other silver lining about this trade is the stock itself and the way it has been behaving. CROX pulled right back to support and appears to be on its way back up which will give our long option a nice boost and if we so desire we can close the short dated option for a profit and re-open a new short position at resistance if we choose to. I will go over this in the video for a clearer view and a better explanation.
So, as we have been discussing over the last couple of weeks, this trade is truly versatile and very forgiving and we are seeing that now. So check out the video below and see what we are thinking now as we continue forward on in this trade.
Coach “Old Money” Holmes