One of the most frustrating feelings in options trading is getting the direction right but having on the wrong trade to take advantage of the move. This is unique to options. The feeling of missing out on an opportunity is not unique, however. We have a couple of trade ideas in auto related stocks that fit that bill and with both having decent sized moves higher it’s a good time to check in on those and see what can/should be done. First, let’s look at a call calendar in General Motors (GM) originally posted on December 22nd:
Buy GM ($42) Jan / Feb 43 Call Calendar for 60 cents
-Sell to open 1 Jan 43 call at 60 cents
-Buy to open 1 Feb 43 call for 1.20
At the time the stock was $42, so targeting a move to 43 near-term and a move beyond that later seemed a reasonable way to limit premium risk. But the stock is above that level before Jan had a chance to expire. So now we need to figure otu the best course of management. With the stock now 44.40 and a few days until January expiration, this trade is still slightly profitable, worth about .50 versus the .60 initially risked, but with the stock now 1.40 above the 43 strike, the position is actually short deltas, even though the overall trade was initiated to be bullish. This is the challenge of calendars. The best hope for the trade the next few days is for the stock to retreat a bit towards the 43 strike. In that case the trade would be much more profitable and the short Jan call would be able to be rolled. But waiting carries some risk, because a move higher in the stock between now and Friday and the trade could actually become a loser. The 43 calls have about .15 of extrinsic premium left, that will decay quickly into Friday and will help the trade a bit. Best bet is to keep a tight leash, hope the stock comes in a bit then roll the Jan short call from a better position of power. If the stock goes higher from here, close the trade and move on.
The second trade to check in on was in Autonation (AN) and it is one that got away even more. Here was the original trade idea, from December 28th:
AN ($51.10) Buy Jan / Feb 52.50 call calendar for $1
-Sell to open 1 Jan 52.50 call at 65 cents
-Buy to open 1 Feb 52.50 call for 1.65
With the stock now 56.60, this trade is a loser, worth about .50 versus the initial 1.00 at risk. There’s not a ton that can be salvaged before Friday in this trade, simply closing for a loss is the best option for those that want to move on. For those that want to stick around until Friday, the trade could get worse if the stock goes higher, it could get less worse if the stock follows through on today’s selling. For those that want to continue the trade after Friday, things get a bit weird.. Remember, the entire amount at risk is just 1.00, but that assumes holding through February expiration. With the stock above the 52.5 strike, that would mean the short Jan calls are assigned, and the position for the next month is short 100 shares of stock, long the Feb 52.5 call. That position is synthetically long the Feb 52.5 put for 1.00. That’s probably not what anyone had in mind when they eyed the bullish calendar, so the best bet is simply to close in the next few days and try to limit the damage. Any roll up and out to February on the short call, to create a call spread would add risk and deltas at this point. (there is one roll that involves closing the Jan calls and selling the Feb 50 calls and creating a short call spread rather than a synthetic long put, but in both case the position is “rooting” for the stock to go down, which is not the initial direction.)