All aboard the CRAZY TRAIN! The crazy train or ride that I am referring to is our diagonal trade in CROX. Last week we were talking about how our trade was mis-behaving and causing us a little heartache. There is an old saying, “time heals all wounds!” Well, in this case that seems to be very true.
As we stated last week, CROX has pulled right back down to the lower trend line support and sure enough it bounced back up. This should be of no surprise as CROX has done this multiple times since March so it makes sense that it would do it again. Having said that, the strength of which CROX has come roaring back has been impressive.
Last week we talked about two ways to approach this trade after a pull back. The first one was just letting the trade ride as is, meaning that we had both the long and short legs of the diagonal on and just waiting for it to get back to where we want it to be. This choice leaves us the ability to roll both options and we talked about how the long option would increase in value and the short option would decrease in value in this scenario. As we spoke about there is another choice we have when these scenarios play out as it has. We have a short option that we had made a large percentage of the profit on and we decided last week to take the money and let the long option ride as the stock rises and then turn this trade back into a diagonal when we pivot off the top side. This changes our trade initially by removing the positive theta component in exchange for an aggressive delta component. As it turns out this was the right move, we never know if this is the right move until after it happens but the beauty of options is that we can add and substract and change the nature of any trade but adjusting the different greeks in the trade.
We have talked about the different greeks in this blog before but I think this is an very important point to make about managing trades such as these. Whenever we adjust a trade we change the nature of the greeks like theta and delta and this needs to be taken into account before making the adjustment so that we understand how the new trade will be affected by the movement of the underlying. We essentially have to ask ourselves what we will do with the adjusted trade if the stock goes up, down or sideways. These things are the same things we asked with the original trade but now the trade parameters have changed and therefore our answers to these questions may have also changed and thus they require our attention and planning.
So in this week’s video we will go over the trade and we can look at how the greeks are shaping up now and what it means to us at this point.
Coach “Old Money” Holmes