Sunday, October 04, 2015

Twitter Update #23 (Upside Adjustment)

Oct 5

Analysis

The overall market rallied on Friday. When it looked like it might drop significantly, it ended up being significant rally day. 

With the move higher, the cost of buying back the put spread could have been done cheaper that what was paid for. That is hindsight. That is trading.

TWTR closed 26.31. The stock moved up in 1.81pts (close - open) closing just about at the high. With the move up, I am gong to look to do a couple of things on Monday. 1) Hedge the gain at the 26 strike 2) Move the short call up and out in time.

Using a 25% rule to adjust against the gain in price, I do not want to spend more than 0.45/c to lock in this gain.

[Edit: It looks like TWTR is going to open higher at 27, a further 0.70. I am going to be adjusting the strikes slightly and purchase the 26.5-25.5 put spread instead]

I want to do this for a little debit as possible, but still leave room for upside appreciation. The follow adjustments will purchase a 26.5-27 collar with downside protection from 26.5 - 25.5 for 0.43/c. This is the cost of protection for next 18d.

If the stock drops, I will attempt to sell out roll out and sell this collar for more than 0.43/c. The maximum value of the put spread is 1.00 and the from the short call 1.29, a total of 2.29/c. The net potential profit is 2.29 - 0.43 = 1.86/c if the stock is below 25.5 at expiration.

If the stock rises again, I will need to roll out the hedges in time and upwards to capture more gain, keeping in mind the 25% cost of hedging against the total gain in stock price.

Trades

Part 1 - Roll the call up and out
+2c Oct 9' 26 Call @ 1.34
-2c Oct 23' 27 Call @ 1.29
Net Debit: 0.05/c

Part 2 - Roll put spread up and out
-2c Oct 9' 25 Put @ 0.14
+2c Oct 9' 23.5 Put @ 0.09
+2c Oct 23' 26.5 Put @ 1.08
-2c Oct 23' 25.5 Put @ 0.64
Net Debit: 0.38/c

Net cost to roll 0.43/c

-End