We have a couple of in-the-money flies getting closer to expiration that I thought I’d give an update on and how we’re looking at them. IT’s an interesting comparison between the two as one is deep in the money and is benefiting from decay while the other is right on the edge of being intrinsically ITM and therefore has more directional risk.
The first one is our BA structure. To recap, here’s the original trade:
TRADE: BA ($108.00) Bought Aug9th 109/105/101 Put Fly for $1.03
- Bought 1 Aug9th 109 Put for $2.66
- Sold 2 Aug9th 105 Puts at $0.97
- Bought 1 Aug9th 101 Put for $0.31
We put on this trade at $108 in the stock which we figured could act as decent resistance and so far has. At the time we were basically doing the trade for even intrinsically, meaning our break-even in the trade was 107.97 and any close on expiration below that spot would be profitable (down to 102.03) with 105 the sweet spot (worth 2.97 there on expiration.)
With the stock at about 107.25 the trade is worth 1.75 intrinsically (109 minus 107.25) if it expired here. It is trading about 1.65, so at this point with only a few days until expiration is not really anything other than a directional bet as to whether it stays a winner or becomes a loser. Any drift lower towards 105 and it gets better, any drift higher to 108 and it becomes a wash, a break above 108 and it risks becoming a loser.
We’re fine with that set-up and will keep holding depending on the stock action. If it was to take out 108 resistance we’d probably look to close it for the best we can. If it stays here or drifts lower we’ll try to squeeze as much out of it as possible and the closer it is to 105 the longer leash we’d likely give it as we’d have lots of room for error as the premium decayed into Friday.
Speaking of decay, the SODA trade is really close to its sweet spot, and even though it expires a week later than the BA structure it is benefiting from decay every day and is just a matter of of how it acts from here as to how profitable it can be. Here’s a recap of the original trade:
TRADE: SODA ($57.65) Bought Aug 55/65/75 Call Butterfly for $2.75
- Bought 1 Aug 55 Call for $5.77
- Sold 2 Aug 65 Calls at $1.75
- Bought 1 Aug 75 Call for $0.48
With the stock at 64.75 this trade is worth 9.75 intrinsically (64.75 minus 55) and is trading at about 6.00. What that means is each day we get closer to Aug expiration with the stock in the same place, the position gets closer to its intrinsic value, or towards 9.75 from 6. In fact, its theta today is about 7 cents (meaning, tomorrow with the stock in the same spot the trade would have gained 7 cents.) That rate of decay (and gain for the trade) increases every day as we get closer to Aug expiration. The risk to the trade is a sudden move away from 65 in the stock, but because it is worth 6 now but intrinsically worth much more it would take a move below 61 or above 69 before the trade flips to being long premium from its current status. That means we have room for a few dollars in each direction for the stock to drift to before we’re no longer gaining money each day on the structure in decay.
What that means is we have a lot more room for error in SODA than we do in BA. So we’ll keep a tighter leash on BA for now and will be vigilant if the stock rallies, but we will likely let SODA go for a while and see if it continues to trade tight to its sweet spot. Ideally we’d get a drift lower in BA towards 105 and we’d be in a similar spot in that.