Last week we converted a bullish call calendar in Macy’s (that had the risk of becoming bearish when the stock went through the strike) to a bullish call fly. Here was how we did the roll and the rationale at the time:
So today we have the stock back near $65 and have a decision to make. In a way we have the stock right where we want it, especially with a 3 day weekend coming up. But the decay collected each day in only 1-2 cents. So it’s not like we’re in some sort of theta holiday bonanza. In our view, the bigger risk here is the stock making a run higher and us being stuck in a short delta position. Therefore we’ll take this opportunity to roll the position to a more bullish one, entirely within May. The trade is up ever so slightly which basically saves us about 10c on the roll:
ACTION – Bought to close the M ($65.00) April 65 calls for 1.10
– Sold to open the May 70/75 2×1 call spreads at .90 (sold 2 May 70 calls at .50 for $1 total, and bought 1 May 75 call for .10)
New Position – Long the M ($65.00) May 65/70/75 call butterfly for 1.15 (currently costs 1.25)
Rationale – The calendar essentially “made” 10 cents (if we closed it right here) which gives us a slightly better entry on the May butterfly. Sticking around with the stock at $65 would make this roll even better but we’re worried about the position getting away from us if Macy’s goes higher, as it wasn’t our intention to be short deltas.
It turns out that roll was good timing as the stock immediately did what we thought it might do, breaking higher from the 65 level and nearing the short strike of the call fly:
So it was good that we rolled when we did. The calendar would be a bust here and that was our worry as we wanted a bullish position, not one isolating $65 in the stock.
With the stock at 68.50 this fly is worth about 1.75. Intrinsically it’s worth 3.50. So time is now on its side. It collects only about 1-2c a day in decay now, but that will start to pick up. Its deltas here are still less than +10 so minor moves higher and lower won’t have dire consequences just yet. What we’ll be looking to see is if the stock can work its way a little higher to the $70 level and perhaps run out of a little steam there, which would be idea. On the downside we have some room to be patient as long as the stock stays above 66.75 or so. So we’ll keep that as a mental stop lower.