At the end of November we looked at the regional bank etf KRE and detailed a position that looked for a small move higher into year end followed by a breakout into the New Year. Here was the original trade, from Nov 28th:
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
A few weeks later with the stock near 58 and the trade idea profitable, we checked in on the trade and detailed two potential rolls for those looking to extend the view. The first was a simple roll of the short Dec call out to March to create a vertical. From Dec 14th:
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.
That roll has worked well. With the stock now 62.20 this trade is worth about 3.25 versus the original 1.40 at risk. So more than a double. Its maximum potential value is 5.00 if the stock is at or above 63 on March expiration. And time is on the trade’s side if the stock were to go nowhere from here, gaining a little bit more in profit each day as the intrinsic value realizes. For those happy with the profits it can be closed at anytime. The only risk to profits is if the stock goes lower but any close above 61.25 on March expiration and the current profits are safe.
The next roll to check out was the slightly more complicated one as we continued the calendar aspect of the trade. Here was that roll idea:
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
With the stock higher than the Jan 61 strike and days until that leg expires, that roll idea is worth about 3.75, so an even better profit versus the original 1.40 at risk. That needs to be updated again though, with the most obvious roll being closing the Jan 61 calls and rolling them up and out to the March 63 calls. That books about .50 in profits and leaves the same position as the other roll but at a lower cost basis.
As you can see there are several ways to skin a cat on these calendars. Of course, this was a scenario where the calendar was the perfect initial position. But as we’ve seen in others, like the recent update in Autonation (AN) the calendar can be the wrong initial position if the stock goes higher in the near term too fast.