DAL – Wrapping Up The Delta Theta Party

by CC August 8, 2017 11:36 am • Trade Updates

A few weeks ago we took a look at Delta Airlines stock (DAL), 54.55 at the time, and detailed a bearish trade in August, targeting a move to 50. Here was the trade, 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

A week ago, with the stock 49.75, near our original target, and worth about 2.40 we updated the trade explaining how patience would mean more profits on the trade over the next 2 weeks, as long as the stock stayed near 50. Here was the update, from August 1st:

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.

The stock has found some footing and is now trading 50.75. With the stock here the trade is now worth about 3.50, gaining 1.10 in the past week, even though the stock is now farther from the 50 strike than the last update. That’s entirely because of collecting decay on the 50 strike.

But of course now the risk/reward profile for trade management has changed. The trade is intrinsically worth 4.25 here, but already mark to market worth 3.50, with only 1.50 more in profit potential if the stock were to close exactly at 50. As far as break evens on the current mark to market value of the trade, we’re now looking at 51.50 for a stop on the upside, and 48.50 on the downside. In a nutshell, it’s not as good of a risk/reward profile to be patient, as a move outside that range, particualrly above 51.50 seems quite possible.

Therefore it makes sense to take the profits now as it’s a really nice winner:

Sell to close the DAL (50.75) August 55/50/45 put spread at 3.50 (for a 2.20 profit)


Rationale – This trade did well, targeting a move lower which the stock reached. Patience over the past week paid off and the trade went from less than a double to almost a triple.