Considering Our Options – $MAS Put Calendar

by CC August 7, 2014 12:12 pm • Commentary

At the end of July we bought a put calendar in MAS with the idea that we could fade the earnings move (earnings were the evening of the trade) and play for the consolidation that would occur before a possible next leg down in the stock. Here was the original trade and view and rationale:

My View:  I do think there is another leg lower in Housing stocks, more likely closer to the end of the Fed’s Taper as opposed to now after a fairly sharp decline recently that could discount bad news in the short run.  In MAS, I want to sell the implied move, playing for a near term consolidation, and look to own some longer dated near the money puts.  Here is the trade:  

Trade: MAS ($20.38) Bought Aug/ Oct 20 Put Spread for .50

-Sold to Open Aug 20 Put at .475

-Buy to open Oct 20 Put for .975

Break-Even on Aug Expiration:

-Max profits with stock at $20 on Aug expiration.

-losses of up to .50 if stock is significantly higher or lower than $20 on Aug expiration.

Rationale:  Assessing the potential range of outcomes, it seems that a miss and guide down, while likely, could see a more muted move given the stock’s 10% decline from the highs earlier in the month.  On the flip side, the disappointments from many peers and the weak data suggest that a beat and raise is fairly unlikely. But the stock could see a bounce on an inline to slightly better report. I think the most likely outcome is under-performance of the implied move which leaves me inclined to sell it and finance the purchase of longer dated puts.  This is not a particularly high risk/ high reward trade, but it takes advantage of the elevated levels of implied vol and fits my thesis on the sector.

Since initiating the trade MAS is up about a dollar and the trade is a small loser here. Because the calendar is two months apart it gives us some options as far as what to do with the August expiration. Right now the short August puts are .05 @ .10 and will likely expire worthless (they are 13 deltas). Currently the Sept 20 puts (the best candidate to roll the calendar) are .30 @ .40 and 27 deltas (the Oct 20 puts we are long are 30 deltas).

What that means is any move towards 20 in the next few days would increase the value of those Sept puts (and our October puts) but not the August puts we are short. A one dollar move lower from here would probably benefit the cost of the roll (in our favor) by 30-40c. With only a few more days until expiration the August puts will probably not increase much at all, even with a sharp move to the strike.

Because of that, any move lower from here means we’d likely roll the position to September (close the August puts for 5c or so, sell the Sept puts to open) The lower the stock is (closer to the 20 strike)  the better that entry is for the roll.