After a tremendous run over the past 8 months or so I ran into a brick wall with my Wayfair trade from last Friday.
On Friday the price jumped 20% and normally after days like that we can expect a bounce back.
But not this time.
The price today jumped another 27% compared to Friday, which is an over 52% jump in 2 trading days.
It's not often that we see huge jumps like this but it can happen.
How do options traders manage these challenges?
The first and most important factor is that we must stay small with our individual stock positions as a move like this can wipe out one's account.
The second is that we cannot react out of emotion, panic and make the wrong moves.
We have to stay rational and either just hang in there or make the necessary adjustments depending on the impact on one's account.
For those, who are new to my daily market comments, I place and document one of my options trades each day with the objective of helping everyone learn how to trade options.
What's my trade for today?
My SQ double calendar is starting to pay off nicely so I decided to give #Nike (#NKE) a similar shot. The earnings is expected around end of March but the volatility is very low for the April expiration (33.2%). In fact it's just slightly higher than the February expiration.
If we take a look at the daily chart then we can see a nice, predictable volatility fluctuation driven by the earnings cycle. The current volatility level is very low and I am 100% confident that it will go higher as we approach Nike's earnings in the second half of March.
What it will do to my positions is that the short strangles (the ones I sold and expire in Feb) will most likely expire worthless and I will be able to roll them to March and reduce my cost basis. On the other hand, my long strangles (the ones I purchased and expire in Apr) are expected to go up in value or at least maintain their value due to the increase in volatility.
These sorts of strategies are not quick wins but they are relatively safe and predictable.
Trade Type: Double Calendar
Strike: $115 / 140
Expiry: 17 Feb
IV Rank: 1
Cap Req: $549
Annualised Prof at Expiration: -1460%
IMPORTANT: Studying previous trades provide the opportunity to everyone to learn a great deal so I encourage you to click on the links below and digest the info.