Thursday, August 20, 2015

Twitter Update #13 (Stock Purchase)

Aug 20

Analysis

TWTR (and the market as a whole) dropped significantly in the morning. The SPY is off 2.20pts and the DIA is down about 1.89.  TWTR dropped right into and slightly through the short strike and is trading for about 26.70

With one day to expiration on the hedges this good and bad.  Firstly, as price has moved past the short strike, the hedge is just past its point of maximum profit and if the price continues to move downward, the hedge will begin to lose money (its a butterfly).  The good news is that we have only one day to expiration so most of the theta has been taken out and all that remains is where will the short option settle on tomorrow - in or out of the money.

Not being able to predict this and given the large move down today, I have elected to close the hedge. I placed an order to buy back the short call, sell the long put, and buy the two short puts back as a package. I will leave on the long put "wing" of the butterfly as it has no value to sell and to leave it as a lottery put for one day.

I placed a working order to sell the above as a package for 1.15.  Remember the entire hedge cost only 0.04 to place. This gives me a profit of about 1.11/c or 2.20 net.  From this I will be able to buy 7 more shares of TWTR.

The next hedge I will placed will also be a 2pt wide butterfly (each spread is 2 pts wide - 4 pts total) and sell a call. TWTR is trading right in the middle of the strikes at 26.70. So I can either hedge a little higher at 27 and pay a debit, or hedge a little lower at 26.5 and either put the hedge on for zero or a slight credit.

In looking at TWTR, it is retesting is lows again but its relative strength is diverging. On that basis, I think we will be getting a slight pop in the stock, so I will pay a little as possible. If I am wrong (and I could be, I have about 0.25 of unhedged space between 26.50 and where its currently trading. This is about $25 per 100 lot of stock. I will take that risk to get a little more downside coverage in the hedge. I will be hedged out for another week.

Trades

Part 1. Close the existing hedge

+2c Aug 21' 30 Call @ 0.08
-2c Aug 21' 29 Put @ 2.27
+4c Aug 21' 27 Put @ 0.52

Sold for a credit of 1.15/c

I will leave on the Aug 21' 25 Put as it has no value to sell and as lottery ticket.

Part 2. Purchase more stock

From the sale of the hedges received I have 2.20 net profit. This is enough to convert into 7 shares of stock.

+7shrs TWTR @ 26.74

Total share position is now 223 (23 which have been bought by the hedges, and the 100 from the assignment of a short put)

Part 2. Re-hedge with another weekly ATM butterfly

-2c Aug 28' 27.5 Call @ 0.50
+2c Aug 28' 26.5 Put @ 0.73
-4c Aug 28' 24.5 Put @ 0.17
+2c Aug 28' 22.5 Put @ 0.11

Net cost of 0.00/c

-End