Going into earnings in JOY, Dan put on a bullish calendar to take advantage of a potential upside move in the stock while protecting against near term options premium that may have been overpricing the potential move. Here’s what the trade looked like:
TRADE: JOY ($57.90) Bought the Dec22nd / Jan13 62.5 Call Calendar for .88
-Sold 1 JOY Dec22nd 62.50 call at .51
-Bought 1 JOY Jan13 62.50 call for 1.39
With the stock higher (60.75) and the trade at 1.40 we want to consider our various options for this structure. As it is now the structure is about 11 deltas so there’s a slight risk to the downside if the stock were to fail here and drop below 60. Its theta, which is important with the December options about a week away from expiration, is just over 3c a day. This will pick up every day as we get closer to next Friday (with the stock at roughly the same level.) Vol is likely settled into an area that is pretty close to what it does after expiration. Given those factors, here are the options we’re considering:
1. Take the profits and move on. With the stock having cooperated it’s tempting to take the money and move on to the next trade. The positives of this option is that it takes the delta risk off the table, books the profits and doesn’t allow the stock to fail and ruin what was a good trade.
2. Roll the Dec call to a higher strike in Jan, creating an upside call spread in Jan. This is the most bullish of the options we’d ever consider. If we had a strong feeling that JOY was at the beginning of a sustained rally and wanted to be better positioned to the upside over the next month and change, this would be the trade. We are not that bullish.
3. Chill out and let Dec premium decay. If the stock doesn’t move much from this spot, the decay in the Dec options that we are short will pick up speed over the next week. Right now they are trading just north of 60c… so that’s 40 to 50c of potentially bigger profits on this trade if the stock were to stay here, even more (if the stock were to go higher from here but not higher than 62.5 by next Friday.
For now we’re going to choose option 3, with an eye on the stock… if the market was to start to get really weak, and we feared this stock was about to go down with it, we’d consider taking the whole thing off. If the stock were to creep higher towards 62.5 over the next week while Dec decayed to under 10c we’d consider booking that Dec profit on the upside.