A couple of weeks ago we took a look at regional banks etf KRE. (Banking on a Breakout (KRE)) and detailed an alternative strategy to play for a breakout into 2018. Here was the original trade idea 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
KRE headed higher almost immediately and was higher than our 58 strike, putting the set-up at risk of being right on direction but wrong on the trade structure. I gave a trade update just a few days later when the etf was 59.10. Here what I had to say about trade management (From Dec 1st):
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.
The etf has now pulled back towards 58 in the days leading up to December expiration which is exactly what we wanted to happen before rolling. So now with the etf $58, the entire trade is worth about 2.20 vs the 1.40 initially risked. That’s a nice profit already, capturing almost the entire current move higher in the stock and for those happy with those gains it probably makes sense to simply close in the next trading day or two. But for those in it for the first few months of 2018 it makes sense to look up and out.
The simplest roll is to close the Dec 58 calls at .55 and sell the March 63 calls at .80. That takes .25 of risk off the table and leaves you with a really inexpensive 5 dollar wide call spread in March.
But another way is to continue the calendar aspect of the trade. When I updated on Dec 1st (in the excerpt above) I mentioned the Dec 60’s as a potential roll, saying that if the etf came back towards 58 a bit more it could maybe be done for even. That would establish a spread strike calendar with room for the stock to go to 60 in January. But with this move to 58 so close to expiration, the roll gets even better, as the Dec 58 calls can be bought to close, and rolled to the Jan 61’s for even, creating even more room for the etf in January. That roll creates a new position, the Jan 61/ March 58 call calendar. If the stock is near 61 on Jan expiration the those calls would expire worthless, and could then be further rolled up and out to March, creating a very inexpensive (or even credit) March call spread. It doesn’t reduce overall risk like the roll to March, but it retains that optionality you get from a calendar as there is more than one way to make money.
The trade is profitable and setting up as well as it can. So there are no bad decisions here. Whether to close or roll, or how to roll simply depends on your view for the next few months.