BIDU is ripping higher today and we are looking at what to do with our current profitable position, especially considering an earnings event on the horizon on April 24th. To recap, when the stock was 87.50 we put on this trade:
BIDU ($87.50) Sell the June 82.5 / 77.5 Put Spread to Buy the June 92.5 / 100 Call Spread, pay 0.45
-Sell 1 June 82.5 Put at 3.48
-Buy 1 June 77.5 Put for 1.95
-Buy 1 June 92.5 Call for 3.73
-Sell 1 June 100 Call at 1.75
Here’s the original risk chart:
So how do we manage this trade with the stock higher?
With BIDU at 90.80, the structure is worth about 1.40 but its potential profits to the upside are alot higher (7.05 max) especially considering the deltas it starts to pick up on a move through its long call strike. Right now the structure carries about a 30 delta but that would approach 50 very quickly if the stock were to break through 92.5.
With that in mind we’d like to let the stock run as far as possible before taking profits. But we also have to be aware that risk remains to the downside on the put spread with an upcoming earnings event. Not to mention that BIDU is a crazy Chinese dot-com stock where wild swings are the norm.
Unlike a typical long premium trade where having more than a double allows you to sell half of the structure to take off all your risk, this BIDU structure has downside gap risk far greater than the current profits. What that means is if the goal is to take off risk while allowing for even greater profit potential we’ll have to look at taking money off the table differently. (We paid 0.45 for the structure, selling half at 0.90 doesn’t cover your risk like a typical long premium trade)
One option is to cover the short put spread entirely and to finance that cover, sell part of the call spread.
Here’s how that would work. Right now the 82.5/77.5 put spread is worth about 1.15. The 92.5/100 call spread is worth about 2.50. If we saw a point where we wanted to take off some risk, we would need to see the total profits on the trade be worth twice what we paid for the call spread minus the profits we would take off on the put spread. At that point you could take off all the puts and half the calls and have no risk left on the trade.
In other words the profits from the put spread will have lowered your point at which the call spread is a double. Of course this is only one option, another would be just booking the profits of the trade entirely and not waiting around for earnings. We’ll update on the site if and when we make a move but I wanted to clarify why this structure is different than just a double of the 0.45 paid being a point where half the trade could be sold and be left with no risk.