One of our favorite year end strategies is slightly upside call calendars in stocks we feel may drift higher into the final trading days of the year with chances for further upside once the calendar flips. We did such a trade in a beaten down stock, QCOM, back on December 14th. Here was the original trade and rationale:
*Trade: QCOM ($46.66) Buy Dec 31st quarterly / Feb 50 call calendar for 1.30
Rationale: once the Fed is out of the way, trading should slow down a tad and equity vol should settle a great deal into holiday shortened trading weeks. I want to look to off set some decay of the long Feb calls over the holiday period and then look to further spread the long Feb calls once Dec 31st expire.
The stock has drifted higher since our entry and with the stock now slightly above our strike we have a decision to make. Do we take the profits or do we keep a bullish stance into the New Year by rolling the short call?
So What’s The Trade?
With the stock at $50.50 the entire trade is worth 2.00 (we paid 1.30) so we can roll and reduce our risk profile while still being in the game for QCOM to have a better start to 2016 than it did in 2015. And with the roll we have several choices. We could roll the short strike out to January and keep the calendar profile, but with the stock above our current strike we’d likely look to turn it into a calendar vertical, with perhaps the 52 strike. That makes sense as January misses earnings and Feb catches them. But it’s also pretty tight for how the stock has been moving and we could find ourselves having to figure out what to do with that Jan 52 strike too soon.
Therefore we’re going to roll the short call out to February and create a simple vertical call spread:
ACTION- QCOM ($50.50) bought to close 1 Dec31 50 call for 75 cents, sold to open 1 February 55 call at 75 cents
New position: Long the QCOM ($50.50) Feb 50/55 call spread for 1.30 (currently worth 2.00)
Rationale – We’re now set up well for upside in QCOM and we own the call spread for under what it is worth mark to market. We haven’t “booked” the .70 we had in profits as we could still lose all of the 1.30 at risk, but we have given ourselves some room to the downside where we can still get out of the trade for a small profit in case the stock reverses course and heads lower.