Towards the beginning of March we put on a bearish trade in CTRP, the Chinese online travel site. The thinking at the time was mostly technical with a potential Triangle of Death™ situation in the works but also the fact that the stock is very expensive at 54x expected 2015 earnings.
Since then the stock has come in a couple dollars from our entry and our puts are in the money and profitable. Here was the trade from March 4th:
Trade: CTRP ($45.99) Bought March 45 puts for 1.95
Break-even on March Expiration:
Profits: below $43.05, down 6%
Losses: up to 1.95 between 43.05 and 45, max loss of 1.95 above $45
With the stock at $44 those puts are worth about $2.75. We looked over some options today to see if we should spread the puts and reduce some of our risk but have decided not to for the time being. Here’s why.
Spreading at this point essentially locks us in mentally for the earnings event itself. Because the stock is already below our long put the strikes that make sense to spread with have to be at least $4o or below in order to give ourselves enough room for a gap lower in the stock. The 40 puts could probably be sold at .75, and the 39 puts possibly at .60. That does reduce some of our risk but probably not enough to pull the trigger on a put sale today. The reason is we’d still have event risk of over a dollar and we really have no idea which way the stock could go on the event itself. In other words, it’s probably not reducing our risk enough. It certainly isn’t locking in any gains.
If the stock was even lower than today over the next few days we may be able to spread those strikes for more which would make us more comfortable riding that position into the event on the 19th. We’d possibly also have a situation where the puts we’re long are a double or more, which would mean we could sell half and take off all of our risk into the event while still being there for the home run.
Of course all of this is academic if the stock reverses higher from here but we’re comfortable naked at the moment because we feel we have some optionality on any move lower.