Update – Williams Sonoma (WSM) Call Calendar

by CC August 24, 2017 11:59 am • Trade Updates

Yesterday we checked in on Williams Sonoma (WSM) into their earnings and detailed a countertrend bullish position with defined risk that looked for a small bounce on earnings and a possible follow through into the Fall. Here was the trade idea, from yesterday:

WSM (43.05) Buy the Sept 47.5 / Nov 45 vertical call calendar for 1.60

  • Sell 1 Sept 47.5 call at .55
  • Buy 1 Nov 45 call for 2.15

The stock is higher this morning on a slight beat and decent guidance.

The results exceeded Wall Street expectations. The average estimate of 14 analysts surveyed by Zacks Investment Research was for earnings of 59 cents per share.

The seller of cookware and home furnishings posted revenue of $1.2 billion in the period, which met Street forecasts.

For the current quarter ending in November, Williams-Sonoma expects its per-share earnings to range from 80 cents to 87 cents.

The company said it expects revenue in the range of $1.27 billion to $1.31 billion for the fiscal third quarter. Analysts surveyed by Zacks had expected revenue of $1.28 billion.

With the stock now 45.25 this trade is worth 2.30 vs the original 1.60 at risk. So a decent winner. But let’s look at it from a trade management perspective. There’s still a few weeks to September expiration, so those are still worth .50 (vs the .55 they were sold at, despite the stock being higher, that’s what happens to vol after earnings and why calendars make sense). If the stock does nothing over the next few weeks that .50 comes in and this is even more of a winner. If the stock goes higher it’s even better as the Nov calls will gain in value much faster than the the Sept calls (if they gain at all, they won’t if the move higher is slow).

And of course there’s a risk of losing profits if the stock goes lower, as it’s long delta. The big issue is that with the stock 45.25 the intrinsic value of the trade is only .25. so any move back below strike is a real risk over the next month or so as the Nov calls could start to lose value.

Therefore I think it makes sense to keep a fairly tight leash on this trade to the downside, if this starts heading lower it may make sense to take profits now and look to re-position. If the stock hangs in here or better yet creeps higher patience over the next few weeks until Sept expiration will be rewarded. At some point it may even make sense to roll the Nov calls higher to the 47.5 line if the stock goes higher over the next week or so. That’s a way to keep a calendar on while reducing risk (or even booking profits, depending on the roll point).