Roku is a fun stock to trade if you’re a momentum lover. It boasts volatility in spades and has provided many interesting trading opportunities along the way. My latest attempt ended with a scratch (that’s trader talk for breaking even). But, I think you might benefit from a trade walkthrough.

We included ROKU in the volatility watchlist of the Options Report on October 12th. It had a bear retracement pattern and I thought it could be a decent bear call spread candidate. The next week I left on vacation but when I returned I found the stock even more attractive.

The stock had run from $100 to $140 virtually uninterrupted and I figured it was due for some mean reversion. So, on Oct 18th when the stock started to fall, I sold the Nov $175/$180 bear call spread for 54 cents credit. Here were the initial trade metrics:

Max Reward: 54 cents

Max Risk: $4.46

ROI: 12.1%

Probability of Profit: 85%

A typical high probability credit spread

Through the rest of the day on the 18th and the next four trading sessions, ROKU dripped lower, pushing the spread value from 54 cents to around 30 cents. I had a target to buy it back if it hit 20 cents, but unfortunately, it never did.

Last Friday ended with a bullish reversal candle giving me a bit of concern for the position heading into the weekend. My initial hope was that we’d see a large enough pullback in the stock to capture a modest profit with the bear call. When I do bearish credit spreads in overbought uptrends (which ROKU arguably was), I usually use a tight leash. This is true of most any contrarian trade where I’m betting against the trend.

In addition, with ROKU earnings looming on November 6th, I wanted a quick exit so I wouldn’t have to brave the gap drama.

This morning stock futures pointed to a higher open giving me a reason to keep a close watch on my bear call position. Sure enough, ROKU gapped up and started trading higher in the first five minutes. The bear call moved back toward my 54 cent entry point and so I decided to kill it. I first tried to get filled at 50 cents but had to modify the order to 52 cents and it filled.

In the end, I made $2 per spread less commission, so essentially breakeven. But imagine my satisfaction when I returned later in the day to find ROKU up 10% on the day! That could have hurt.

This is my idea of a great trade. The trade setup was sound. My entry timing was spot-on. I gave the stock every chance possible to work and then when it didn’t, I was able to depart with dollars and dignity intact.

If only all losing trades allowed for such a graceful exit.

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