I decided to book the profits in this position for a couple of reasons. One being it was trading @ $30 in the morning before the Tim Geitner spoke and I thought the market would likely sell off after he was finished. I was correct. It sold of hard.
The second being this stock along with others in it’s space have been showing strength lately in addition I believe the spread wasn’t positioned quite right – it need to be wider and the long leg deeper in the money. So once the market is done selling off I may re-enter this trade albeit a little differently.
Had I positioned this one better, I could have bought some puts at the same strike as the short strike which would have the same affect as closing the position. If I bought 1/2 as many puts as I had short contracts, I would have closed 50% of the position. Or I could have bought the same number puts as longs and would be completely closed.
Why do this? Well, for one I have over 2 months left on this trade which is a lot of time. By buying the puts I can ride the stock down if it sells off, sell the puts for a profit and be right back in the trade with less cost. Also, the bid/ask on the stock is a bit too wide making slippage a problem. The stock sold off 11% from it’s $30 perch which could have yielded me a nice profit for the next day and I could have sold the puts and waited for the stock to run again – because I don’t think the thesis is over and it should run again soon.
Why not do it this way with the current trade? Because the cost of the put exceeds the initial cost of the spread which would put the position underwater if the stock doesn’t correct. Ie. it’s not truly closing out the position because I would have to pay more for the put than I originally paid for the spread.
Close: Apr 20/22.5 BLCS for Credit 1.85
ROI: +37%
Sean's Trading Journal 