Considering Our Options: $MSFT July Call Fly

by Dan July 1, 2015 12:08 pm • Trade Updates

On June 16th we placed a trade that defined a range in MSFT over the coming weeks into July expiration (read the full trade idea here). To refresh here was the in the money call butterfly:

Trade: Buy the MSFT (46) July 43/46/49 call fly for 1.35

– Buy 1 July 43 call for 3.30

– Sell 2 July 46 calls at 1.05 (2.10  total)

– Buy 1 July 49 call for .15

Break-even on July expiration:

-Profits: up to 1.65 between 44.35 and 47.65, max gain of 1.65 at 46

-Losses of up to 1.35 below 44.35 and above 47.65 with total loss of 1.35 below 43 and above 49.

The idea at the time was to play for a consolidation in the stock at the midpoint of the 2 month range and collect some premium along the way.  Since the trade on June 16th, the stock declined $2 to $44 and then had a 1% bounce today. Now, with the stock at $44.60 and a little more than 2 weeks to expiration the trade is worth $1.35, which is what we had originally paid for it.  This is despite the stock having moved away from our guts (the 2x short strike, also our entry) by 1.40. This is the decay in effect and a move back towards the strike would reveal that decay in the form of the net profits.

But at this point, with the stock closer to the the break-even level of $44.35 (the long strike plus the premium paid) than the guts of the fly, we need to keep a close eye on the trade as it is largely a market call. If the market continues lower MSFT would threaten to go below our intrinsic breakeven and we would have to make a decision to make as the clock is ticking towards July expiration.

So we’ll keep that intrinsic level of 44.35 in mind and use 44 as a hard stop on the downside where we’d bail on the trade for a small loss rather than wait around on something that would begin decaying against us rather than for us.

On the flipside, a consolidation towards 45 or even better a move back towards 46 means we can be patient and let the decay (in our favor above 44.35) accelerate into July expiration.