Saturday, October 17, 2015

Twitter Update #27

Oct 16

Analysis

Expiration Friday! TWTR rallied today closing at 31.15, a daily move of +1.07pts (close - open).

Since the last hedging trade at a closing price at 29.83, this is a now a total positive upward move of +1.32pts

Earnings is approaching in TWTR and the implied volatility percent ranking is at 57% for options in the 7-149d range. This is within the top 15% of implied volatility over the last year (52 weeks). [Source: Optionanalysis.com]

Sticking to my rules of spending no more than 25% of upward move on the hedge, that would be 0.33 to attempt to lock in this gain.

The current hedge still has about 28 days until expiration, so while theta is starting to pick up, I will probably have to roll out in time again to get a reasonable price for the hedge.

I will look at some possibilities keeping in mind some points:

1) Add additional debit to the position of no more than 0.33/c
2) Earnings is coming up, so volatility is probably rising and the EM is widening
3) A Butterfly can be used for a cheap hedge, but its important to keep the strikes wide enough to capture a downside move. Too narrow a butterfly range will not widen out enough to collect any profit, start with 2-2.5pts wide strikes per side
4) A put or put spread will provide superior protection against sharp downward moves
4) If rolling out in time, keep days to expiration as low as possible to maximize time (theta) decay, especially if a butterfly is used as a hedge

Trades

Part 1 - Roll up and out the short call
+2c Nov 13' 30 Call @ 2.76
- 2c Nov 20' 31 Call @ 2.36
Net Debit: +0.40/c

Part 2 - Roll up and out the long butterfly
Sell Old Hedge
-2c Nov 13' 29.5 Put @ 1.56
+4c Nov 13' 27.5 Put @ 0.90
-2c Nov 13' 25.5 Put @ 0.48
Net Credit: 0.24/c

Purchase New Hedge
+2c Nov 20' 30 Put @ 1.85
-4c Nov 20' 28 Put @ 1.07
+2 Nov 20' 26 Put @ 0.56
Net Debit: 0.27/c

The difference between purchasing the 30-28 put spread and the 30-28-26 butterfly at current volatility is 0.50/c. This is significant.

Net cost to roll up the hedge: +0.43/c. This is +0.10 over the 0.33/c but with a limit order on rolling the calls, I might be able to shave the cost back a little more.

The hedge is also effective for a 10% move down in the stock, 31.15-3.11 = 28, over the next 35d.

-END