Considering Our Options – Garmin ($GRMN)

by Enis September 24, 2014 12:48 pm • Commentary

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:

GRMN daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg

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:

GRMN daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg
GRMN daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg

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.