I bought a put diagonal in GRMN last week, and the stock has promptly sold off, testing the crucial $50 support level this morning. To recap, here was the trade (see full post here):
TRADE: GRMN ($53.36) Bought the Jan15 52.5 / Oct 50 put diagonal for $2.64
-Bought 1 Jan15 52.5 put for $3.18
-Sold 1 Oct 50 put at $0.54
$50 is important near-term support for GRMN, and near the low from last week after the Apple Watch was first announced:
Earnings will be after Oct expiration, so no major catalysts exist for GRMN between now and Oct expiration. The main risk to this trade is a big move higher in GRMN, so we’ll be watching the $55-$56 resistance area closely in managing the position.
Fast forward to today:
With GRMN near my short Oct 50 put strike, I wanted to review my plan for this position. First of all, the intrinsic value of my put diagonal is $2.50 (long Jan15 52.50 put vs. short Oct 50 put). The Jan15 52.50 put also has significantly more time value than the Oct 50 put, so the mark-to-market price of the put diagonal is currently around $3.30, versus my cost of $2.64.
As I think about managing this position, it’s worth analyzing the directional risks. The trade structure is currently a short 17 delta position, meaning for each $1 dollar move lower in GRMN, the put diagonal will gain $0.17. I would expect the delta to become flat with GRMN around $48 in the near term, so the position will start to lose money on delta if GRMN starts to sell off below there. However, since I paid $2.64 for the put diagonal, and it will always be worth at least $2.50 in intrinsic value below $50, I am not at risk of losing much premium on the downside.
Rather, the risk to this position still remains a big mover higher in GRMN, particularly above $54. Given that the 50 day moving average is steadily declining and currently below $55, that seems unlikely in the short run, though it’s certainly still a possibility. Yet, since the put diagonal currently has a positive decay of about 1.75 cents per day, I like the idea of waiting in this position since time is on my side. So even though a breakdown or bounce back from $50 is possible in GRMN, as long as the move is not more than $4 in either direction, it will have been a better decision to wait on this position as Oct expiration nears and premium comes out of the Oct 50 put, instead of taking it off for a profit here.