Following an appearance on Fast Money by Cathie Wood where she highlighted 3d printer stock SSYS in particular, Dan detailed a trade that looked for upside potential in the stock over the first half of 2019. Here was the initial trade idea, from January 15th:
SSYS ($20.50) BUY JUNE 17.50 / 22.50 RISK REVERSAL FOR 50 CENTS
-Sell to open 1 June 17.50 put at 1.25
-Buy to open 1 June 22.50 call for 1.75
At the time of the original post, the stock was 20.50. Now, just a month later it is significantly higher, trading 27.50. That’s the exact type of move you want in any long delta trade, but particularly with a risk reversal setup like this one. The margin requirements and risk/reward profile of a risk reversal is similar to stock but where the risk reversal setup works nicely is when looking for an outsized move potential without having to worry about the day to day gyrations of a stock. In this case, the stock could go anywhere between 17.50 and 22.50 in the next few months and the only thing at risk was the .50 paid. BUT, of the stock went higher, above 22.50 it basically is like being long stock for the breakout. That’s what happened here. The other positive is once that breakout happens the position can be adjusted, sticking around for more potential gains while taking risk off the table.
So let’s check in on this trade. With the stock 27.50 this risk reversal is worth about $6, versus the initial .50 paid. The June 17.50 puts are now worth about .40 (the were sold at 1.25). That’s sort of amazing considering the stock is so much higher but it is emblematic of the volatility in this sector. (and an upcoming earnings report.
I do think it makes sense to cover those to close and take that outside risk off the table. And for those that this move is enough, or course the entire trade can be taken off at a profit.
But for those looking to book some profits and keep the position riding there are a couple of things one could do (all include closing the short put.) The company reports earnings the last week of February and it has obviously ramped into that report so it’s probably not super wise to keep the 22.50 calls because a big move lower on the report could wipe out profits and there aren’t alot of great meaty upside calls to sell to take off that risk.
One idea is to book the current profits of 6.00 and roll to a call calendar (for those looking for more upside). Right now the March/June 30 call calendar is offered at about 1.60. Which would book a majority of the current profits and leave some possibility for more. If the stock is at or below 30 on March expiration the June calls would remain in play and could then be further spread by selling a higher strike call in June after March expiration. Even if the stock goes sideways or slightly lower following the Feb report this trade would be in decent shape considering the way this stock moves and the fact that current profits will be mostly booked.