1:30 p.m. New York time
Today is 21 days before expiration of my short bear call spread options position on SPCE, which I entered on June 1 for a $70 premium per contract. The position expires on July 16.
Under my rules for such trades, the 21-day mark is when I manage the position, closing the winners no matter how small the profit. I hold on to the unprofitable positions, usually, playing the odds that the position will return to profitability.
And the chance of a return is significant. The smaller the loss the greater the odds of a profit. Research done by the TastyTrade — the best source I’ve found of information about options — found a 7-0% chance of a return to profitability if the loss at 21 days is one or two times the premium, when the initial short leg of the spread had a 16% delta, which is is the standard delta for placing the short leg under my rules. (The full video discussion of the research can be found here.)
So what about my SPCE position?
The analysis of the position posted at the time put the odds of the price remaining below the upper boundary of full profitability — $36 — at 78%. But I fudged my rules in positioning the short call in the position. Rather than putting it at the 16 delta mark, I put it at delta 39%.
My reasoning went like this. Context: It’s a low volatility market, and SPCE is the only liquid symbol that met my Implied Volatility Rank (IVR) requirements. Even with all of that, the premium at 16 delta was low. My Elliott wave analysis (see the chart on the entry analysis post) suggested little chance that the price would be above the $36 mark, and so I accepted the increased risk
And the analysis proved to be accurate, with the price making a few small forays above $36, until June 22, when the price began to rise, exceeding $40 the next day. And then today, on June 25, the price shot up, reaching a high so far of $56.40.
I’ve often said in my daily analyses of the S&P 500 that Elliott wave analysis provides context, not prophecy. It will tell us the implications of what we see on the chart right now, but if the chart changes, then so does our analysis of the implications. So it is with this chart.
The rise that began June 25 is a 5th wave, and probably a 3rd wave within it, which means that there’s significant upside left. At present, the share price is at 53.48 and the cost of exiting is $3.78 per contract share. The present loss is approximately five times the premium, which places the odds of a reversal to profitability as very unlikely indeed.
And so the question becomes, what’s the best exit strategy? First off, rolling the short call up isn’t really an option. The long call in the position has a strike price of $41, which is still in massive loss territory.
But of course, that $41 long strike is my insurance policy for the position, limiting my loss. If I hold the position through expiration, I’ll pay no more than $41 each for the shares dumped into my account.
And of course, we’ve had a very large rise today, and every rise I’ve seen is followed by a partial retracement. So I have 21 days to wait for that to happen, limiting my loss.
So here’s my decision: I’ll continue to hold the position, keeping a close watch on it, as always, and preparing to exit when the price is right. The “right” price will be a profit, of course, if it happens. And if it doesn’t, then the “right” price will be one that lessens the pain the of the loss.
Learning and other resources. See the menu page Analytical Methods for a rundown on where to go for information on Elliott wave analysis.
By Tim Bovee, Portland, Oregon, June 25, 2021
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.
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