Updated: Oct 19, 2021
UPDATE: We were able to close this trade out for just over $1,000 of profit in one day. All the planning below is certainly nice to have as a backup, but you can't beat locking in profits early.
Topping out at over +100%, today was an insane day in the market for GWH. As is the theme with a lot of our trades, we like to get some action on the exciting names like this one but we like to take advantage of the crazy swings to find a safe way to do it. The trade we constructed today has a max profit of $4,140 and a breakeven price which lies 68% below the price of the stock when we entered. For starters, here is what the trade looks like:
So if GWH stays flat from here and remains above $20, this is the result of the trade. The first two legs will hit max profit, and the hedge (3) will hit max loss and it will all net out to a tidy little gain for us.
To illustrate how we got here though, let's take a quick look at what we did to arrive at this full trade.
(1) -50 GWH 12/17 7.5p
After the amount of success we've had with RKLB so far on selling Jan 2022 puts, we have been patiently waiting for another great opportunity to set up a similar trade. To me, this was that opportunity. We take a stock that theoretically has a base in the $9-10 range and set ourselves up with an 8-week trade that has a breakeven price of $6.98 (7.5 - 0.52). That alone provides a monster cushion from the $20ish stock price when we entered. I was perfectly happy with this trade by itself, but over time the IV continued to climb and we entered into the second leg.
(2) -20 GWH 11/19 7.5p
If you've followed our trades you'll know that we sold 100 RKLB Jan 2022 7.5p on the aforementioned trade. So a position size of 50, as shown above, was done intentionally to allow the flexibility to sell more contracts if premium got better. With trading in general, we need to accept that we'll never time the peak. That held true as we sold the 12/17 7.5p and then IV continued to climb which made the puts even more expensive. To take advantage of that, we added some nearer-term expiry 7.5p which were offering $0.35 when we were filled. This objectively is a better trade than (1) which is why we added it to our position. The reason why is that this is a 1-month trade which brings in $0.35 of premium while the other is a 2-month trade which brings in $0.52 of premium. Two months worth of these would be the equivalent of $0.70 in premium, $0.18 better than the trade we were originally in on so that's the mindset we had when evaluating this addition.
The result was just an increased bullish position but I was happy to continue to add because we (1) had the flexibility to do so by not using up all of our buying power up front, and (2) it was objectively a better trade than what we were already in so I was happy to add it.
From here we now had 2 positions which were both bullish. Due to the fact that they were 7.5p, they were already inherently hedged but with such a large position we wanted to do a little better.
(3) -6 GWH 11/19 17.5/20c
For the third and final act (for now) we wanted to hedge the position so we opened a bearish call credit spread. In short, this position hits max profit ($840) if GWH finishes below 17.5 by expiry (November 19th).
I like to use other stocks for the sake of comparison and to help us predict future potential price movement in what we're currently looking at, and I think IRNT is a great example of what we may expect from the move we're seeing here.
Seen above, IRNT is a former SPAC (just like GWH) that underwent a merger and spiked up to $60 over the course of about 3 weeks before it inevitably came tumbling back down to earth. There are 2 things that I really want to highlight here, and they are (1) the inevitable fall, and (2) the area the stock levels off at.
(1) The Inevitable Fall: I will be the first to tell you that I expect GWH to fall. Could it run up to $60 before the fall, similarly to IRNT? Absolutely. But I would bet just about everything I own that there are some big red days ahead. But that's okay because again, we sold 7.5p so we just need the price to hold above that level. But with expiries in November and December, what if that fall happens in the next 4 weeks? We need to protect ourselves and the position outlined here accomplishes that by paying out $840 if GWH finishes below 17.5 by 11/19. If it doesn't, this leg will hit a max loss of $660, but we don't really care because that means we'll hit our gain of $2,640 as outlined above. The cool part about this trade is that we have a nice little sweet spot between 7.50 and 17.50 which bring me to the second point from the IRNT chart
(2) Leveling Off: After IRNT's wild ride, it settled down in the $11.50-$14 range over the last couple of weeks. From start to finish, what we see on the chart above encompasses about 2 months, which is roughly the timeframe between now and our December expiry. So let's say that GWH finishes somewhere in that range. Here is what our trade would look like:
Anywhere in that range of 7.50-17.50 is the same result: A max profit of $4,140.
The simplest way I can put it is that we set up a bullish/neutral trade on GWH, it can drop 65%, and we'll still hit max profit. That's the power of selling options and identifying great areas of opportunity like this one.
One other small consideration that you may be asking yourself as you read this is about the expiry of the hedge. Our hedge expires on 11/19 while our larger position expires on 12/17. The plan here is to protect against a quick drop. If that happens, we can take max profit and then open another call credit spread for December which would increase our max profit further. If the drop doesn't happen, and GWH remains above 20 by 11/19, we likely will have enough profit on the 12/17 7.5p that we can just close the position our a month early for a really nice gain.
"And HT, you mentioned this is a former SPAC. Do we need to worry about a PIPE unlock?"
The answer is yes. Using our example above, IRNT had 12.5M of PIPE shares out of 64M shares (19.5%)
For GWH I'm having trouble finding it in their filings, but this is what I found on Twitter, which claims 16% PIPE ownership:
Typically there will be another filing as a precursor the the 424b3 where we can more clearly see the info so we'll keep an eye on it, but for now we have reason to believe that the cushion we currently have should be plenty.
If you're not in, I think the 11/19 are going to be the way to go. I like the flexibility that the shorter timeframe gives.