We liked the possibility of upside in 2 stocks, GM and TWTR (these stocks have nothing to do with eachother) and placed a similar structure on both as a play that the new year would be the time where both could see significant upside. In both cases the stock has shot up quickly through our strike level almost immediately after putting on the trade. Both are winners but both are worth looking at because there’s so much time until their front month expiration.
Let’s look at GM first. To recap, here’s the trade from Dec 4th:
TRADE – GM ($38.75) Bought the Dec/March’14 40 call calendar for 1.60
With the stock at 40.90 this structure is now worth 1.75. But the issue is the stock looks really strong, and we don’t want a bullish bet to turn into a bearish bet here.
Similarly, we placed a trade in TWTR, with the same thought process that the stock was bouncing from recent lows, and would likely have trouble closing above its highs of the year this month, but could see a breakout in the start of 2014.
To recap, here’s that trade from Friday Dec 6th:
TRADE: TWTR ($45) Bought Dec Reg / Jan 48 Call Spread for 1.05
When Dan and I were discussing this trade, we really wanted to do the 50 strike as it seemed the spot for the stcok to find resistance. The options weren’t cooperative on that though, as at the time of the trade both Dec regular and Dec27 50 calls were dollar cheap, and we didn’t feel like they offered enough premium to sell. So we looked down a few dollars and decided on the 48s. Then today the stock rips higher through that strike and is currently trading above 49.
With the stock here this structure is worth about 1.25. But like GM, we’re at risk of this bullish bet becoming too bearish. Because of that, on a pullback to strike by either of these stocks we’re likely to adjust and maybe set-up for something slightly more bullish, particularly in GM. In TWTR we’ll have to see how it sets up options wise, because the play there was really for a move close to 50 in December. We’re less positive about the New Year for that stock.
So we’ll keep an eye on these two trades as we don’t want winners to turn to losers. (above strike both of these trades are short small deltas, and that gets worse the higher they go) On pullback towards strikes look for us to adjust, and if the strength continues look for us to close and rethink strike levels on both.