Anatomy of a Trade – DELL and INTC

by CC August 29, 2012 12:05 pm • Education

We wanted to take the time to go over two trades, the DELL we just closed and the INTC that we continue to look at.

In DELL, we put on the trade for a net debit of .09 and were presented with the opportunity to take it off at .18 for a .09 gain. The term structure has collapsed with Sept implied vol and October implied vol on the 11 line trading only 1.5 points apart. Essentially, what we were banking on happening happened.

We considered keeping the position on as our deltas here are slightly negative, almost neutral, and with the puts being at-the-money,  we know our theta or decay is greater on the Sept option than the Oct so it will decay faster. Thus if stock stays quietly here we would have even more profit.

The complication is that stock has been drifting lower. Dan’s outlook for the PC makers is negative going forward as he mentioned in this recent Morning Word post. As the stock drifts lower the trade becomes slightly positive delta. (The higher gamma of the at-the-money means the the delta changes faster thus becomes negative faster. Since we are short it we are net positive.) Also since Sept expiry is still far away, the difference in the theta between the two options is only .002. With a lot that can happen between now and Sept expiration, it made sense to take our profit now and not count on the less probable scenario of stock staying right here for the next 25 days.

In INTC, , the Sept 25/23/21 Fly is essentially a 25/23 1×2 put spread at this point. Right now the trade is about 45c or so, having paid .28. Today it’s been higher than 50c on occasion. We’re keeping our eye on this one, but think since there are still 3.5 weeks to Sept, we might want to sit for a bit longer. At this point the trade works out to be a short delta of 30. So moves upward will take some profits off the table. However, if the stock stays in this range or continues to drift lower, the 2 we’re short on the the 23 line should make up for any absolute decay in the 1 we’re long in the 25 line. (Normally, if this was a 1×1 put spread the worry would be the opposite as the 25 line has alot more premium to lose.)

So we’ll sit tight on that one and keep an eye on it. If the stock continues to drift lower and we get a shot at taking this off for more than a double, we probably will. If the stock looks like it catches a bid, we could make a move to not lose any potential profits. We’ll update on the site when we move, as always.