Last week Dan previewed Oracle’s (ORCL) earnings event and detailed a few ways to play for a pullback in the shares, one short term, isolating the event itself and one looking out to January. First the one isolating the event, the Dec 50/47 put spread, expiring this past Friday turned out well and was worth slightly more than a double. The other one is looking out to January:
ORCL ($50.50) Buy Jan 50 / 45 Put spread for $1.10
-Buy to open 1 Jan 50 put for 1.35
-Sell to open 1 Jan 45 put at 25 cents
With ORCL now 47.91 this trade is worth about 2.10, so nearly a double as well. What’s nice about this trade is that the Jan 50’s have doubled on the move lower while the short Jan 45’s are profitable as well on the vol collapse. That’s ideal and why spreads offer a slight bit of protection into events followed by a big vol crush as opposed to just long puts or calls.
But now with the stock approaching the midpoint of the width we should start looking at ways to possibly book some of the profits. There are a couple ways to take some profits or risk off the table while continuing a bearish position. One is to simply roll down the Jan 50 strike, selling them at 2.22 and buying the Jan 48’s for .82… that takes the original 1.10 off as well as books .30 of the profits. It leaves on a Jan 48/45 put spread that can be worth up to $3.00 if the stock is at or below $45 on Jan expiration.
The alternative way to book some profits but extend the view out beyond January is to close the Jan 50 put and roll it out to the March 45 put. That roll books .50 of the current profits and leaves you with a Jan/March 45 put calendar. The ideal situation in that case is for the stock to continue lower towards 45 and see more profits, and at which point the Jan 45 puts can be closed and rolled out and lower into March, setting up for another earnings event with all potential profits risk free.
Both rolls play with the house’s money while booking a small part of the current profits. The only thing at risk is the balance of the current profits. But even so those profits can be realized by closing the new positions at any time. Which roll depends on the bearish view out of the event last week, and how far out you want to extend that view.