Update – See SPOT Run

by CC May 16, 2018 2:47 pm • Trade Updates

About a week ago, after Spotify had fallen from its high near 170 to what seemed like support at the 150 level we detailed a defined risk bullish trade that looked for a small move higher near term that could potentilly finance for a breakout into the Fall. Here was the trade idea, from May 9th:

SPOT ($150) Buy June / Oct 160 call calendar for $5

-Sell to open 1 June 160 call at $7

-Buy to open 1 Oct 160 call for $12

This call calendar reduces risk to just $5 all the way out to October. That’s pretty ideal in a volatile $150 stock like SPOT. What is sacrificed to have an inexpensive calendar is that you’re hope is a small move higher in the near term. In the case of SPOT we’ve gotten a pretty decent move higher in just a week and the stock is now slightly above the June short call. With that in mind let’s check in on the trade and see how it’s doing and how best to manage it.

With SPOT now 161.65, the call calendar is worth about $10 versus the initial $5 at risk. That’s pretty nice as it is and for those fine with a double in quick time it of course can be closed for a profit.

But for those looking for more upside in the stock the calendar will need to be adjusted soon. The higher the stock now goes the worse for this trade as the deltas will accelerate on the short side the more time that passes towards June expiration (as long as the stock is above 160). That puts the current profits at risk, but more importantly changes the initial bullish positioning intended at entry.

There are a couple ways to roll a calendar that is working well, ideally you’d want to roll the short strike up and out, creating a call vertical. The challenge is finding a roll where you are able to take money off the table rather than add to your current risk.

Looking at August, the 170 calls are about 5.50, but the roll to those would actually add to the risk of the trade as the June calls would need to be bought to close for a dollar more. The Aug 165 calls could be rolled to for a credit, but the resulting position isn’t ideal, as it would be a Aug 165, Oct 160 vertical calendar for $4. The issue with that trade is if the stock made new highs between now and August the trade could lose current profits as we’d be facing the same issue of having to roll the short strike higher.

Therefore the best roll (for those not interested in taking the current profits) is to turn this into a call vertical in October, buying the June calls to close and then selling a higher strike in October. Which strike depends on your level of bullishness and all the rolls offer about the same risk/reward ration. For instance, the roll to the 190 calls in Oct can be done for about even right now, leaving a 30 wide call spread with $5 at risk (currently worth about $10). This keeps the level of risk the same as the initial trade but allows for a really nice reward if the stock makes new highs. A lower strike possibility is the 180 calls, where the roll could be done for for a nearly $3 credit. That would reduce risk down to just $2 and allow for profits of up to $18 if the stock closes at or above 180 in October.

Again, these are rolls that don’t book profits, the first keeps the same risk on the table, the second reduces the risk greatly, but neither book the profits. Those looking for the quick double can simply close the entire trade now.