Anatomy of a Trade – $NTAP Dat

by CC December 8, 2015 2:49 pm • Commentary

On November 19th, following NetApp’s (NTAP) fiscal Q2 earnings, we entered a bullish trade predicated on our belief that the company’s rock solid balance sheet and poor price action could once again pique the interest of activist investors (or even m&a). Here was the trade and rationale at the time:  

*NTAP ($30.75) Buy Dec / Mar 33 Call Spread for .90

Rationale – This trade finances March upside calls by selling December of the same strike. The ideal scenario is that the stock grinds higher towards 33 over the next month into Dec expiration. The 90c premium paid for the calendar is the max risk on a sharp moves lower or a a gap move substantially above 33.  If we get to Dec expiration and the short Dec call has offset the decay in the long March call we will then look to either turn into a diagonal calendar by selling a higher strike call of a shorter dated expiration, or turn into a vertical spread by selling a higher strike call in March expiration.

NTAP is slightly higher since we entered the trade and the trade itself is an ever so slight gain, worth about 1.oo mark to market versus the .90 paid. The Dec calls we are short are now about .07 and about 10 deltas. A good rule of thumb on a short option is that you probably want to wrap it up when it gets down to about 10 deltas. So what are our options here?

Since the stock is only about .50 higher the roll isn’t a no brainer here. In that rationale we state that out ideal situation would be to turn the trade into a diagonal on a move higher. But the stock isn’t that much higher so a roll probably needs to remain a straight calendar. But that’s not all bad, it reduces the overall premium risk and pushes out the time needed for a move up to 33 to really be set up well.

But ultimately this is a stock direction call. And we like the opportunity still. So even as the December deltas approach zero and the overall deltas of the position increase the calendar has done its job so far. Obviously, we have to be careful of weakness in the stock, and if that becomes an issue a simple roll of the calendar makes sense.

But our ideal situation remains a grind higher towards 33 over the next few weeks, at which point we would be in good shape to roll into a more bullish diagonal or be left with a very cheap March call that’s more in play.