I’ve written a bit lately about how to manage a losing trade. With that in mind I want to revisit a trade that was intiially a loser, that we wrote about hwo to adjust and give it a chance, and how it’s worked since. Here was the original trade, in Target (TGT), from May 19th:
TGT ($56) Buy July / Oct 60 Call Calendar for $1
-Sell 1 July 60 call at 55 cents
-Buy 1 Oct 60 call for 1.55
At the time, the stock was $56. Nearly a month later we checked back in on the trade idea with the stock lower at 53.15 and the trade a loser. We rolled to better align the strikes with where the stock was trading, from July 13th:
TGT (53.10) Sell to close the July/Oct 60 call calendar at .55 (for a .45 loss)
Buy to open the Aug/Oct 57.5 call calendar for .60 (1.05 net)
- Sell to open the Aug 57.5 call at .40
- Buy to open the Oct 57.5 call for 1.00
Rationale – This only adds .05 in risk to the original trade but has a much better chance of success to get back to even or make money.
The key on that roll was were able to be a bit creative with a calendar (moving the short strike out a month and down 2.50) and only add .05 of additional risk. That worked well and when we checked back in on the stock after earnings it was trading 56.25 and the trade was worth about 1.50, a gain of .90 on the updated position and a gain of .45 on the original. So it turned a loser into a winner with only .05 more in risk.
We then updated for those wanting to ride this out to October expiration (Friday), from August 17th:
For those in TGT for a more long term view, the Aug 57.5 puts can be closed and rolled to a sale of the Oct 62.5s at .30, creating a very cheap 5 dollar wide call spread out to October. For those looking to take off almost all the risk while leaving with an opportunity to make money on a move to 60 the Oct 60 calls can be sold at .75.
Now with expiration approaching the stock is even higher, trading 60.20 the Oct 57.5/62.5 call spread is worth, 2.55 and the 57.5/60 is worth 2.15. Both adding nice profits to those from the call calendar.
The key point here is that sometimes when a position goes wrong, there’s not a ton that can be done. But sometimes by being creative on the structure, you can make trade more realistic following a stock move without adding a ton of extra risk, as you never want to throw good money after bad.