We’re not doing a ton of trading in this Holiday shortened week as we expect some slow drifts sideways or higher over the next 2 weeks and our preferred structure has been some put calendars. But we are keeping a close eye on some existing positions that run the risk of getting away from us on the upside if the slow drift higher does occur.
We have two flies worth watching here. The two are now both short deltas and are at risk if the stocks break out to the upside. What’s interesting is they were initiated with different directions in mind, one neutral/bullish, one bearish. But as is the nature of flies both were essentially range trades and with the market higher they are both now bearish.
The first of the flies is an EBAY trade we put on more than a month ago when the stock was $54.35. Here was the trade and the rationale at the time:
TRADE: EBAY ($54.35) Buy to Open the regular expiry Jan15 50/55/60 Call Butterfly for $1.94
-Buy 1 Jan15 50 call for $4.90
-Sell 2 Jan15 55 calls at $1.65
-Buy 1 Jan15 60 call for $0.34
Rationale: This trade will gradually make money over the next two months if EBAY continues to trade between $52 and $58. It is not a trade for those who have a strong bullish or bearish view on EBAY shares, but is a good risk/reward position to express continued rangebound price action in the stock.
At the time of initiation the intrinsic value of the trade was 4.35. However, there was a ton of time left for that intrinsic value to be realized. What that means is movements within the range ($50-$60) would not have a ton of effect on the PnL in November and December. Implied volatility is generally the biggest factor early on as spikes in vol decrease the value of the in the money fly and drops in implied vol increase the value. The vol did spike after initiation but it is essentially the same now.
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1 Yr EBAY from LiveVol Pro[/caption]
With the stock now above $57 the intrinsic value of the fly is worse, but mark to market it is a small winner at about $2.20. As long as the stock doesn’t break out above resistance at $58 and head quickly towards $60 we can be patient on this one.
On the other hand, the ALTR fly is a bit annoying and needs to be on a much tighter leash. To recap, here’s the initial trade and rationale:
New Trade: ALTR ($37.10) Buy the Jan 38/35/32 Put Fly for .90
-Buy 1 Jan 38 Put for 1.65
-Sell 2 Jan 35 put at .45 each or .90 total
-Buy 1 Jan 32 Put for .15
Rationale: This trade plays for a return back towards those converging moving averages. This has been a fairly big run-up in the stock but if it did just fail to breakout a pullback of a few dollars becomes realistic. Risking 90c means that you’re essentially shorting the stock from here to 35 but without unlimited upside risk. Obviously any moves higher and it’s a loser, or any serious gaps lower below 32.90. But that seems like good risk reward.
The stock is now around $38 and any significant moves higher from here probably means it’s not worth sticking around as the idea isn;t to have an out of the money put fly. Directionally, this was a much more aggressive structure than the Ebay trade. Whereas the Ebay trade had a cushion in both directions from an intrinsic/ mark to market standpoint, the ALTR trade’s mark to market at entry was exactly its intrinsic value (.90). Because of that, it’s only cushion was to the downside and it was more of a defined risk short of the stock than a range trade.
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1 Yr ALTR from LiveVol Pro[/caption]
With the stock now near $38 this structure is worth about .50. A breakout from these levels gets us above our 50% loss threshold not to mention the problem of having an out of the money short, which was never our intention. If that happens we’d take the trade of there and move on.