In early Sept we detailed a call calendar for HD to put in new higsh after a minor pullback. Here wad the trade, from Sept 11th:
HD ($158) Buy the Sept 15 (weekly)/ Oct 160 call calendar for $2,
- sell 1 Sept 15th weekly 160 call at .60 cents
- buy 1 Oct 160 call for 2.60.
Shortly after we updated the trade and rolled it into a straight vertical. From Sept 14th:
Update
Buy to close the Sept 160 calls for .20 (for a .40 profit)
Sell to open the Oct 165 calls at .95
New Position: Long the HD (159.35) Oct 160/165 call spread for 1.25 (currently worth 1.75)
Breakeven on Oct expiration – Gains above 161.25 and losses below. Max gain of 3.75 at or above 165. Max loss of 1.25 below 160
Last week, with the stock 163.40 we checked back in and I had this to say:
With the stock 163.40 the Oct 160/165 call spread is now worth 3.00 vs the 1.25 currently at risk. It can be worth up to 5.00 if the stock continues higher, and it will be worth 3 or more as long as the stock is above 163 on Oct expiration.
Therefore from a trade management standpoint it makes sense to keep a really tight stop on the trade here and try to be patient if it goes higher.
The stock has gone higher and is now above 165. With the stock now 165.10 this trade is worth about 3.60. So being patient paid off and the trade is now worth about .60 more than last week. But now it is above the 165 strike. If the stock closed here on October expiration it would be worth $5, another 1.40 in profits on top of the current profits. But that’s the most it can be worth and those looking to ride it up even farther may need to roll at some point soon.
One roll to consider would be to stay in October and just roll up to the Oct 162.5/167.5 for 2.60. That would book 1.00 in profits and allow for up to 2.50 in profits if the stock is at or above 167.50 on Oct expiration. So that basically takes a dollar in profits, and adds another 1.10 in potential profits.
The cost for taking some profits and allowing for more than the current position is that this new trade won’t make money if the stock goes nowhere and closes at 165 liek the existing trade does. It bumps an in the money call spread with a lower breakeven to a slightly less in the money call spread with a breakeven (165) right where the stock is currently trading.
So that roll make sense for those thinking this stock gets to 167.50 in the next few weeks, but want to take some profits in the meantime. For those happy to cash in on the current move, keeping a stop on the current profits at 153.60 makes sense. If the stock closes here or slightly higher another 1.40 in profits will come in. If the stock falls slightly but stays above 153.60 it will still have more profits. Below 153.60 and the current profits are at risk on Oct expiration.
This trade is nicely profitable so there are no really bad decisions, but understanding what one gives up to roll higher and take profits and what one gives up by staying put on the current trade is keen insight into how extrinsic premium works.