Friday Gameplan - 1/13/23 (A look at rolling short calls)
We typically write these up when we're losing money, but the good news is we are currently on track to take home almost $4,000 this week. Been a while since we've had a big dip but figured this would be a good way to discuss how we plan to manage what we're currently holding as a guide for those of you who are following along.
To kick things off, these are the positions we currently have open and the resulting profit or loss for each position if they expired right now.
As you can see.. it's good news. The only position currently on track to take a loss is WBD, but that's a very minimal loss which will be very manageable if it continues to move against us. What we want to emphasize here is that while these are bearish short calls, we want to manage these similarly to how we would manage a cash secured put if we were running a bullish wheel-type trade. With a cash secured put we would aim to roll down and out for a credit. With these calls, we would want to roll up and out for a credit.
So what does that mean? It means that the credit to open on the new position will be greater than the debit to close on the old position. It also means that the new position will be at a higher strike. Let's use WYNN as an example.
WYNN Management Example:
Let's assume that WYNN finishes tomorrow at 98.61 (today's closing price). As seen above, that would mean the 98c are worth 0.61 at the end of the day and we'd be looking at a $24 gain on the position, even though it moved against us. We have two options from there. The first option, of course, is that we could just close the position out for profit and move on. Nothing wrong with that. What I personally am more inclined to do is to continue the position and roll it up and out for a credit. Why is that?
Our initial bearish thesis on WYNN was that it was approaching a level of resistance and was overbought from an RSI perspective (1 year RSI reading of >70). As of today, this is what we're looking at:
As you can see from my beautifully drawn red circles, those factors still exist. RSI on a 1-year basis is 73.58. The stock is still trading around that level of resistance. So in my opinion that bearish thesis still exists and we should continue the trade. Now the question is how do we go about doing that?
As stated, we'll want to roll the 98c that we hold. Conceptually, this is where our breakeven price becomes important. Since we sold the 98c for 0.85, our breakeven price on this trade is 98.85 and below. Since RSI is elevated and the market is elevated, we could just roll the 98c out a week to a 98c with a Jan. 20th expiry. Those currently trade for $2.00.
So if our debit to close the old trade is 0.61 (as discussed above) and the credit to open the new trade is $2.00, it means we receive a $1.39 credit on the trade. This takes our breakeven price from 98.85 to 100.24 (just add the 1.39 credit to the old breakeven). Our max profit would be the original 0.85 credit + the new 1.39 credit for a total potential max profit of $2.24, or $224.
Why do we like this option? Because (1) the bearish indicators still exist, (2) it raises our breakeven price which increases our cushion in case we're wrong, and (3) increases our max profit from $85 to $224 in case we're right. That's decently significant and that's the approach I plan to take on several of these trades. So let's look at how that would play out for the rest of the positions we hold:
WBD is almost identical to what we discussed above, and results in an even greater potential profit. SPOT is currently on track for max profit so no need to roll it, but if it runs further I could definitely get behind the idea of playing it bearishly again next week until RSI cools off. XSP is a strangle which we'll just let expire where it may before opening another for next week.
But that's what our preliminary management plan looks like. We could also see the market flush tomorrow, these all hit max profit, and we don't need to worry about it, but it's always important to have a Plan B in the markets and this is how we plan to execute that. Plan C, in case things get really bad for any of these, is to increase position size in addition to the roll.
Hope everyone who has followed along has also had a great week and we'll be back live streaming on Sunday recapping it all so be sure to tune in on YouTube or Twitch.