Update – $XLY: Rolling Short Strike of Put Calendar

by CC January 11, 2016 10:20 am • Trade Updates

Less than a week ago we entered a slightly bearish trade in XLY (consumer discretionary etf) that looked to finance February downside puts by selling the same strike in January (read here). At the time we did the trade XLY was $76 and we chose the $74 strike. Under normal circumstances that seems like enough room to not worry about the stock crashing through that strike (and the trade becoming net positive delta, or bullish which is not the intention) but with so much weakness and follow through in the market we now find the stock at our strike just a few trading days later. Luckily the trade is profitable and we have some options as to how to manage it from here. To recap, here was the trade and rationale at the time:  

*XLY ($76) Buy Jan/ Feb 74 put calendar for$1

Rationale – If stock is within striking distance of the strikeon Jan expiration we would look to roll to a vertical spread in February that catches a lot of the etf components’ earnings.

With the stock now $74 this trade is worth 1.25 (vs the 1.00 paid). As I said though, the issue is that if the market continues lower this becomes net positive deltas and we don’t want that. So how can we roll this? We’re going to roll to a February vertical like the plan was all along:

Action: Buy to Close 1 XLY Jan 74 put for 90 cents
Action: Sell to Open 1 XLY Feb 70 put at .95 cents

Executed the roll for a 5c credit.

New position: XLY ($74.05) Long Feb 74 / 70 put spread for 95 cents (currently worth 1.25)

New Break-Evens on February Expiration:

Profits: between 73.05 and 70 make up to 3.05, max gain of 3.05 at 70 or lower.

Losses: up to .95 between 73.05 and 74,  max loss of .95 above 74

Rationale for Roll:  While we are adding deltas to this trade at lower levels, the price action increases our conviction on the bearish thesis, and we are not willing to wait and see if the stock consolidates around $74 between now an Friday’s close where the short leg would expire.