Let Me Check My Calendars: JD, INTC

by CC December 21, 2017 2:04 pm • Trade Updates

One strategy we like to detail into the holiday season is calendar spreads, selling near term options to finance the purchase of ones out a few months into the new year. The idea here is that markets tend to slow down into year end, both from a day to day volatility perspective (not that we’ve seen much vol otherwise) but also company specific, as we go into a fairly uneventful period without earnings reports. I wanted to check in on two of those we’ve detailed recently, as both stocks have moved close to strike. The first to look at is Intel (INTC). Here was the original trade idea, from December 15th when the stock was 44.60:

Buy INTC ($44.60) Jan / Feb 47 Call Calendar for 50 cents

-Sell to open 1 Jan 47 call at 30 cents

-Buy to open 1 Feb 47 call for 80 cents

Now with the stock 46.90 and near the calendar strike, this trade is worth about .70, or .20 more than the initial price. The key for this trade over the next few weeks is if the stock can stock around this area, as the Jan 47 calls will decay at a faster rate than the Febs. Currently the Jan 47s are about 1.07. With the stock at or below 47 that 1.07 is completely extrinsic premium and will decay. The only issue is that since these are regular Jan calls that expire on the 19th, there’s still some time, so they won’t decay that rapidly. Therefore a good tight stop on the upside for a roll makes sense into year end. If the stock takes off towards 48 it may make sense to roll the Jan’s up and out into February. Otherwise, if the stock sticks around this area the best time for that roll would be closer to Jan 1st, as this trade will be more profitable at that point and the roll better.

Now onto another similar calendar that benefits a little more over the holidays because its short strike expires a few weeks earlier, on Jan 5th, but it does have a slight negative now in that the stock is trading higher than the strike at the moment, as well as being a company from China with a slightly different set of trading rules for the holiday period. Here was the original trade idea in JD, from December 13th:

JD ($40.50) Buy the Jan5th weekly / March 42 call calendar for $1.45

-Selling to open 1 Jan 5th weekly 42 call at 55 cents

-Buying to open 1 March 42 call for $2

With JD now 42.25 this trade idea is worth about 1.80, so it’s working well but also requires some management foresight. The biggest issue on this trade is if the stock continues higher from here. This is a bullish position that could quickly become bearish. The Jan5th calls are roughly 1.15 right now, that means about .90 of extrinsic premium that could come in quickly over the Holidays if the stock is around this area. But that also means that if the stock continues higher that extrinsic buffer goes away and the Jan5th short calls become a real drag with their negative deltas. Therefore a stop if the stock gets above 43 probably makes sense. If that happens then it can either be taken off for a small profit or those Jan5th calls can be rolled up and out to Feb or March, re-establishing the trade as long delta. But patience would pay off if the stock remains near 42 as those Jan5th calls will decay rapidly as we get close to year end.