Trade Update – $CMG: Closing March Put Butterfly Prior to Earnings

by CC January 30, 2014 3:29 pm • Commentary

Earlier we detailed our thought process for our profitable bearish position heading into tonight’s earnings release (see below).  With the stock down almost 10% from the highs earlier this month, and our put fly worth almost 3x what we paid for it and we are going to close the entire position and look for a better entry on our bearish thesis.

Action: Sold to Close CMG ($496)  March 500/450/400 Put Fly at $11 for a 7.75 gain



Original Post Jan 30th, 2014 at 11:59:   Considering Our Options – $CMG March Put Butterfly

Over a month ago we made a bearish bet on CMG, that we’ve adjusted since. To recap, we started with a put calendar, let the front month expire worthless, then when the stock sold off, we adjusted the long put into a bearish butterfly. Here’s how it looks so far:

INITIAL TRADE from Dec 10th (here):  

CMG ($522.50) Bought Jan / March 500 Put Calendar for 15.00

-Sold 1 Jan 500 Put  at 7.00

-Bought 1 Mar 500 Put for 22.00


After the Jan puts expired worthless and the stock sold off to $509 we adjusted the trade this way on Jan 23rd (here):

Action: CMG ($508.70) Sold to open March 450/400 2×1 Put Spread at 12.25

-Selling 2 March 450 Puts at 7.00 each or 14.00

-Buying 1 March 400 Put for 2.25


Current Position: CMG Long March 500/450/400 Put Fly for 3.25


CMG reports Q4 earnings today after the bell (the options market is implying about a 7% one day move) so we want to look at the probabilities of the trade from here versus the profits we’ve already made. Right now, with the stock at about 495, the Put Fly is worth about 10 dollars. Its max potential is $50 at the sweet spot of $450. Intrinsically it’s worth about $5 here. Since the structure is in March the intrinsic value will take a while to play out even if the stock sells off towards $450 following the report, but if it’s within the established break-even range that extrinsic to intrinsic value will be helped by falling implied volatility after earnings. So for instance, if the stock is $480 tomorrow, the fly won’t be worth the full $20 in intrinsic, but it will be a lot closer to that value than if it was there going into earnings.

So for now, with the stock here, we’re comfortable letting the trade ride into earnings because of its profit potential versus the current mark to market value. (our net risk is only $3.25, but the risk of profits already realized remains at risk if the stock goes higher on earnings) If the stock was to sell-off into the close that could change as that risk/reward would of potential profits would be different.

So if the stock is near 500 going into the close we’re likely to let the entire thing ride. If we see selling into the close it’s possible we’ll take some or all of the trade off.

Stay tuned, we’ll update today if we make any moves.