Update – DAL: Delta Theta Party

by CC August 1, 2017 3:26 pm • Trade Ideas

Prior to Delta (DAL) earnings in early July we detailed a way to play for a pullback in the shares, not just isolating the event itself but looking out to August. Here was the original trade and some of the rationale, from July 11th:

DAL ($54.55) Buy the Aug 55/50/45 put fly for 1.30
  • Buy 1 Aug 55 put for 2.25
  • Sell 2 Aug 50 puts at .52 (1.04 total)
  • Buy 1 Aug 45 put for .09

Rationale – This targets 50 to the downside, and gives some time out to August for it to play out. If the stock moves lower on earnings not all the profits will be immediately realized, on the flip side if the stock goes higher or nowhere the losses won’t be binary and the trade has time for the stock to go down this Summer.

Delta didn’t move much on the earnings itself but has been under pressure a bit since and now the stock is near the target of this put fly. With the stock 49.75 this trade is now worth about 2.40 versus the initial 1.30 at risk. So this is working well but can be worth a lot more if the stock settles in this area over the next 2 weeks. Therefore, for trade management purposes putting in a stop to the upside and downside makes sense.

The best way to do this is use the current mark to market value of the trade, in this case 2.40 and use the intrinsic value of that in either direction as a stop. The current mark to market value of 2.40 means that any close between 47.40 and 52.60 on August expiration and this trade will be worth more than it is now. And obviously, a close at or near 50 means it can be worth close to $5. The chances of a gap in either direction outside those stops is unlikely, so small moves in either direction can be ignored. Only of the stock approaches either of those stops should the trade be taken off. This type of patience will be rewarded as the trade gains in value each day due to decay of the short 50 line puts. The pace of that decay collection (theta) picks up as we approach expiration, so the longer the wait (as long as the stock is between those stops) the more profits.