Earlier this week we took a look at regional banks at the etf KRE. (Banking on a Breakout (KRE)) Dan detailed a large short term bullish trade in the market, and then followed up with an alternative strategy to play for a breakout into 2018. Here was the alternative trade, from Nov 28th, when KRE was $57:
Trade Idea: KRE ($57) Buy Dec / March 58 call calendar for $1.40
-Sell to open 1 Dec 58 call at 50 cents
-Buy to open 1 March 58 call for 1.90
In the few days since, the etf has gone higher, a little more than we’d hope and is now above the short Dec strike. With the stock now 59.10 this trade is profitable, worth about .55, but it’s above the short strike so we need to be a little careful as to not ruin a good set-up all the way out to March. What has proven true is the overall trade was dollar cheap, and owning those March calls make a ton of sense. As far as trade management purposes we’ll need to keep a really tight leash on the overall trade as any moves higher from here will not be great as the Dec 58 short deltas cost the position.
Therefore the best bet is to look for a pullback towards 58 in the coming trading days at which point it may make sense to roll the Dec calls up and out. Right now the Jan 60’s are worth about .40 less than the Dec, meaning the roll would cost some money. The ideal spot for a roll would be if those line up to be rolled for about even.
On the flipside is the stock continues higher the entire trade may need to be rethought, with a roll of both legs higher. We’ll keep an eye on it over the next few days and update on the site.