While the boarder market seemed determined to march in a straight line back towards the highs over the past few months, we made sure that many of a short biased trades could withstand a few months of low volatility, as we thought the rally wouldn’t last, but were unsure of where that reversal would come. We expressed that view in the form of put calendars in various sectors of the market. This strategy buys time and allows you to look out into the future on a directional play without being too concerned about decay in the near term. Most of those had a May expiration on the short put side, and while that’s still a few weeks away I wanted to check in one of those trades in particular since we’ve seen this reversal in the last week. Here was the original trade in FXI, the Chinese FTSE 25 index etf:
*FXI ($35) Buy May / Aug 33 put calendar for $1
- Sell to open 1 May 33 put at 33 cents
- Buy to open 1 Aug 33 put for $1.33
FXI is now below the short strike and worth 1.30 mark to market. Our intention was not to be long deltas if the etf got below that short strike so now is a good time to roll:
ACTION: FXI (32.80) Buy to close the May 33 puts for .90
- Sell to open the August 28 puts at .60
New Position:
*FXI (32.75) long the August 33/28 put spread for 1.30 (currently worth 1.60)
Rationale – We would have liked to be a little more patient on this roll but with FXI now below our short May strike we run the risk of losing profits if the etf heads lower from here. With this roll we don’t book any profits, we merely have a put spread all the way to August for a little less than what it is now mark to market. Our new breakeven on the trade is 31.70 and it has profit potential of up to 3.70 if the etf is at or below 28 on August expiration.