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Tales of a Technician: Milking Winning Calls

January 14, 2020

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Long calls are a rarity for me. Their aggressive and expensive nature doesn’t typically fit my personality or directional bias. I’m a +1 to +2 guy, not a +3 gunslinger. But last week, I pulled the trigger on a call option in Canopy Growth Corp (CGC).

I suggest pulling up an options chain of CGC to follow along with the numbers. You can even build out the adjustments in a risk graph to model the impact of each.

On Jan 6th, I purchased the April $17.50 call for $3.40. At the time, the stock was at $20, which placed the call $2.50 ITM. I feel like only paying 90 cents in extrinsic value for three months is dirt cheap for a stock as crazy volatile as CGC. Its ATR was $1.20, for crying out loud.

$CGC chart on Thinkorswim
CGC Chart

My rationale for going bullish was as follows:

  • A. CGC was starting to establish itself above the 50-day moving average for the first time since its nasty descent began in mid-May.
  • B. Accumulation days were returning. The last three upswings saw heavy volume suggesting institutions were wading back into the waters.

I lucked out getting such a massive rally today (+12.51%). The calls ballooned in value gaining $2.23 or 66% ROI. Now I’m faced with the pleasant dilemma of how best to maximize gains. Quick wins like this are rare, so I can’t squander the opportunity! If I can succeed at really milking the occasional big winner, it can offset a handful of losers.

As I see it, I have three choices:

  1. Scale-out
  2. Roll up
  3. Roll to a vertical.

Or perhaps some combination of the three.

Technique #1: Scale-Out

The first path is arguably the easiest. No need to engage in mind-bending gymnastics. If you’re waffling between getting out and staying in, then do a bit of both. If you own multiple contracts, sell 1/2 or 1/3rd. It’s psychologically pleasing because it creates a win-win. If CGC keeps ripping, you’ll rack up additional gains. If it reverses lower, then you’ll be happy you at least took some off the table.

I could see someone taking profits at the close today to avoid a down gap tomorrow morning. I could also see them placing a tight stop below 5-minute support in case we see powerful follow-through tomorrow.

Technique #2: Roll Up

Rolling up provides a second consideration. With CGC up over $2.50 today, my call has gained as much in intrinsic value. At trade entry, I only had $3.40 of my portfolio tied up in the stock. Now, I have $5.63 in it or roughly 66% more. What if I swapped out the expensive call with a cheaper one by roll up to a higher strike price?

For example, I could sell the April $17.50 call for $5.63 and buy an April $22.50 call for $3. Think of it this way. I’m locking in my $2.63 profit and then using it plus a few more bucks to buy a new call. If the stock keeps rising, the new call maintains my open-ended profit potential. But if the stock retreats, I’ve almost completely removed my original risk capital and am therefore only risking the house’s money.

The roll order involves selling to close my April $17.50 call while buying to open the April $22.50 call.

Technique #3: Roll to a Vertical

A third option is rolling to a vertical. Specifically, we are morphing the long call into a bull call spread by selling a higher strike call option against it. Any premium received from the short call will directly reduce our overall risk. The tradeoff for risk reduction is the short call officially caps our profit potential.

For example, suppose I sell the April $27.50 call for $1.50 credit. My long April $17.50 call becomes a $17.50/$27.50 bull call spread at a net debit of $1.90 ($3.40 – $1.50).

  • Pro: I cut my risk from $3.40 to $1.90, a 44% reduction. I can still profit up to $810 ($10 – $1.90) if CGC rises past $27.50 by expiration. My current profit is only $2.63, so it has tons of room to grow.
  • Con: My position delta drops from close to +100 to +65. That means I’ll tack on additional gains at a slower pace. Also, my profit is now capped.

Honestly, $8.10 doesn’t seem like much of a limit. That translates into a 238% ROI, so I don’t think I’ll be complaining of the cap. Bottom line: I really like this adjustment.

The Clever Combo: Roll Up + Roll to a Vertical

I could get more creative still. Let’s combine rolling up and rolling to a vertical. Sell to close the profitable April $17.50 call to lock in the $223 profit. Then buy the April $22.50/$27.50 bull call spread for $1.50. You’ve locked in a minimum gain of $73 and still have the potential to capture another $350, or $423 total.

Isn’t trading options fun!?

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One Reply to “Tales of a Technician: Milking Winning Calls”

  1. MattRanum says:


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