Good day Ya’ll! We are back with the Rookie Blog and we are still following our CROX trade. This diagonal has be cruel and kind to us all at the same time which is really one of the ways these types of trades can work out.
Recently, CROX has bestowed a great gift on us and we are going to take advantage of all it has to offer us. The gift I am referring to is the meteoric rise that CROX has exhibited as of late.
Before we get into the gift we have to discuss how this situation has played out. In the previous issues of this blog we talked about how CROX had pulled back from the top side of the channel we identified before putting on the trade and that this took our trade from a slight profit to a losing profit/loss position. In addition, we extolled the virtues of this trade, that being that even though the direction was working in our favor that the time decay was still working for us each and every day. This pullback from the top of the channel was not unexpected and then the following bounce off of support was also expected and that is when we had our first decision to make, do we leave the short leg on and let slip in value as the stock turned back upwards? As we spoke about in that blog we wanted to capture some of the profit from the short leg as we had gotten the lion’s share of the premium in our favor and so the call was made to take it off. This led to the next question, do we recover the position with a new short leg or do we let the long call run as it is the most efficient tool for a directional move. We decided to let the call ride as we had confirmation to the upside and if CROX stayed true to the form it had exhibited since March then we should do quite well.
As it turns out that was the right decision, however the beauty of the diagonal trade is that it wouldn’t have mattered if we had put the short leg back on as we could have rolled it as we saw fit. We were able to maximize effeciency by leaving the short leg off and looking at our current position shows just that. In today’s video you will see how the position is working out, its trading NIRVANA! for this position.
Before we get to that video there is a discussion that needs to take place. When placing this trade we have to make decisions about how we want to exit this trade. There are several decisions to be made, such as what do we do with the expiring short options? Or what do we do with the long leg if it runs in our direction or against us as well? Lots of decisions to be made.
This week we have a decision to be make as well. You see CROX has blown up and that puts us in a position that a decision should be made to reap the benefits of the directional nature of the diagonal trade. Our long option was less than a .60 delta option and now that the price has gone in our direction that delta has gotten up to around an .85 delta. This changes the nature of our original trade and this gives us a unique opportunity. We have the opportunity to take some profits off the table and return the trade within the original parameters of the trade while still leaving ourselves the benefit of any further profits that may come along. As we had decided to leave the long leg uncovered and let it run we still have the opportunity to cover this trade and create more cashflow for the remaining time left in the original option expiration.
As you can see this trade is working out about as well as one could have hoped, hence the NIRVANA part. We are going to continue to monitor this trade as it may have more to give and we are letting this winner run as long as we can as that is the key to trading success. Check out this week’s video to see how we managed this trade.
Happy Trading,
Coach “Old Money” Holmes
