In mid October we placed a bullish leaning trade in Applied Materials (here), that in hindsight was too cute with the extension of the rally that was yet to come. We looked to finance January calls in AMAT by selling Nov 6th weeklies of the same strike. Here was the original trade and rationale:
Trade: AMAT ($15.68) Bought Nov 6th weekly/January 16 call calendar for .48
-Sold to open 1 Nov6th weekly 16 calls at .27
-Bought to open 1 January 16 call for .75
Breakevens on Nov 6th expiration:
Profits: max gains on calendar with stock at 16 with trailing profits above and below.
Losses: if stock goes down from entry or well through the 16 strike to the upside. Max risk the .48 in premium paid for the calendar.
Rationale – we want to give this thesis time to play out and the weeklies that expire just before the November 12th earnings allow us to finance the just out of the money January calls. If we get to Nov 6th weekly expiration and the stock is in a similar spot we will look to sell a higher strike call against the Jan 16 call that we own to further reduce the premium at risk.
The strike we chose was too tight and that is a bad when it’s a calendar because a position intended to bullish can quickly become bearish in the near term (until the front month expires). We gave the trade some time to play out as we wanted to see the stock pull back towards 16 but the market (and semiconductor stocks) are not having many down days recetly. With the Nov weeklies expiring today we have a choice to make, we can either close the weeklies and then simply own the January calls (for slightly worse than they are trading) and look to spread those, or we can close and move on. We don’t like the idea of adding deltas here so we’re going to close for a small loss and look for a better entry on a pullback.