Well, it’s been a good run. Our CROX trade has been awesome, but like all good things in life, this trade must end. We have reached the point in this trade where we just have one real decision left to make? Let’s take a look at the state of the current position and then we can discuss what we need to do to this trade before it ends in the monthly expiration in March.
One little note before we get to the current position. As good as our trade in CROX has been there is one thing that would have made it even better. You see, even though CROX has enough liquidity to trade as a stock it does lack a little bit in the options department. To be an ideal liquid stock from an options standpoint we really would like to have weekly options. For the rest of the liquidity factors CROX checks the boxes. It has over 100 contracts of open interest and volume for the ATM options. It does have tight bid/ask spreads on the options. These are things we must have to have liquid options and the final kicker is we would like to have weekly option expirations because it gives us more freedom over strike prices and more opportunity to collect premiums.
With CROX we don’t have those weeklys so now that we are left with only one expiration before our long call expires and therefore we need to make a final decision on what to do between now and that expiration.
So, now onto the current position. We are sitting on a nice closed profit even though right now our open P/L is down around a grand. We talked about how last week any upward movement in price would be beneficial for this and that any significant pullback would allow us to benefit from more theta. We did get the pullback and now we are in a position to sell more credit and wait for the position to expire in a few weeks. Because of the nature of the current position, we cannot lose on this trade and we can only increase our net profit with an upward move. This setup leaves us with a decision, which strike should we sell? If the price moves up selling an OTM call is the way to go, however, if the price moves down we could sell an ITM call which we could prosper from the down move but there is a catch to the downside, selling an ITM call would increase the potential reduction in profits.
So, in this week’s video, we will go over all the options and take a look at the risk graph to see how each scenario would play out and what I believe is the best way to finish off this great trade.
Coach “Old Money” Holmes