On June 29th I detailed a bearish strategy on Morgan Stanley into its upcoming Q2 earnings:
If you agree that MS will report meh earnings and guidance and the news from the Fed and the stock’s reaction is not likely to cause a mysterious reversal then pressing the short playing for matched 52-week lows, with defined risk makes sense.
MS ($47.90) BUY JULY 48 / 44 PUT SPREAD FOR $1.10
-Buy to open 1 July 48 put for 1.35
-Sell to open 1 July 44 put at 25 cents
Rationale: this trade idea is slightly in the money, offering a break-even down around 2% with a potential profit of nearly 3 to 1 if the stock is down 8% in the next three weeks.
And detailed on CNBC’s Options Action:
— Options Action (@OptionsAction) July 2, 2018
Since June 29th shares of MS are up 2% (most of the gains coming today) or about 90 cents and the bearish trade idea detailed then is now worth about 40 cents with the stock at $48.80. With a little less than two trading days until there Q2 earnings report on July 18th prior to the market open, there is an important decision to make, cut loses or leave an out of the money trade idea on that breaks-even at $46.90, down 4% from the current trading level.
What’s important to consider right now is that the probability of success for a break-even is very low. As a rule for long premium directional trades, it makes sense to stop losses at a certain point, usually, around 50% of the initial premium outlay as the probability of a full loss increases dramatically after that point.
Action: Sell to Close MS ($48.80) July 48 / 44 put spread at 40 cents for a 70 cents loss.