Salesforce (CRM) reported a strong Q1 after the bell last night. The stock is up about 4% as I write and I wanted to check in on the short premium trade we put on yesterday. As I said this trade is part of a specific strategy we’ll be implementing regurlar on the site that needs to be viewed as a whole rather than one offs. Here’s what we had to say about the strategy:
We are going to start a running feature on RiskReversal of short premium, defined risk trades. These will be into events where we the implied move is too high, they will be targeting high vol itself sometimes in farther dated months, and sometimes they will be in stock where implied vol isn’t that high but where we feel breakout and breakdown moves are unlikely in a given stock over a given amount of time.
The impetus for this strategy is because we have so many directional trades on the site (which we consider one offs in each case) that we often have a series of long premium trades without a balance of short premium trades. This is a result of demand for those directional trades. But as we’ve said time and time again, long premium directional trades, especially into events when implied vol is elevated is a losing strategy over time mathematically if not paired with an equal or greater amount of short premium trades.
The issue with short premium trades is as one offs, they also have a mathematical disadvantage because your potential gains are often a lot less than the potential risk of an outsized move. Doing just one means you may lose greater than you could have made. In other words, short premium strategies only work in bulk. You have to do them consistently in order to see the profits.
But we’d also like to showcase how these trades can be done in a defined risk manner.
Here’s the link to where we will be showing these trades as a group.
So checking on the CRM trade:
Trade: CRM ($69.85) Sell to Open the May22nd weekly 65p/67.5p/72.5c/75c condor at 1.20
– Sell 1 May22nd 67.5 put at 1.20
– Buy 1 May22nd 65 put for .50
– Sell 1 May22nd 72.5 call at 1.10
– Buy 1 May22nd 75 call for .60
With the stock at 73.10 this trade is worth about .95, meaning it could be closed for a slight profit. Intrinsically right now it is worth .60, meaning if the stock closed exactly here tomorrow afternoon it would be an even greater profit. But since expiration is tomorrow, there’s a lot of deltas to worry about, all basically within the short call spread. Right now the deltas of that short call spread are about -50. Tomorrow at this time, if the stock was in the same place, those deltas would be closer to -100. So we have to keep a short leash on the trade here. Ideally we get some weakness this afternoon towards 72.50. At or below that level tomorrow afternoon means there’s potential to capture the entire 1.20. But our breakeven on the upside is 73.70, so not a ton of room there if the stock catches a bid into the close.
We’ll update when we are ready to close it out.