Update 5/26/2022: I exited my short bear call vertical spread on DLTR, 22 days before expiration, for a $4.01 debit per contract/share, a loss before fees of $267 per contract. Shares were trading at $158.60, up $25.14 from the entry level.
The Implied Volatility Rank at exit was 69.8%, down 22.7 points from the entry level.
I exited on the day after entry because the stock price moved contrary to what analysts had expected. DLTR beat earnings expectations, the share price rose sharply, and the bearish options position moved into loss territory. I exited at 109.6% of maximum potential loss.
Shares rose by 18.8% over one day for a +3,186% annual rate. The options position produced a 66.6% loss for a -24,303% annual rate.
I have entered a short bear call vertical spread on DLTR, using options that trade for the last time 23 days hence, on June 17. The premium is a $1.34 credit per contract share and the stock at the time of entry was priced at $133.46.
The Implied Volatility Ratio stood at 92.5%.
|DLTR-bear call spread||Strike||Odds||Delta|
The premium is 53.6% of the width of the position’s short/long spread. The profit zone covers a 9.7% move to the upside and an unlimited move to the downside.
The risk/reward ratio is 2.7:1, with maximum risk of $366 and maximum reward of $134 per contract.
How I chose the trade. The trade was placed to coincide with DLTR’s earnings announcement, before the opening bell on the day after entry. The short strikes were set to coincide with the expected move of $13.95 either way, based on options pricing, which gives a price range of $120.17 to $146.67. I entered a bearish trade based on the Zacks Investment Research earnings surprise predictor of -4.88% along with a sell rank of 4.
By Tim Bovee, Portland, Oregon, May 25, 2022
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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