My next trade: Call Calendar on WMT (Walmart.)
What I like to do is have a quick Q & A with myself before I initiate any trade...
- (Q) What is the Expectation for a Call Calendar?
- (A) Stagnant to Slightly Bullish
- (Q) Is there any recent news that will help support this type of trade?
- (A) Yes & No. Earnings meet expectation and the stock was flat on the news. I don't see any fixed news events to act as a catalyst to move the stock up or down. Need to pay attention to the overall market conditions. News and Sentiment.
- (Q) Is there any new events in the near future that can have a negative effect on this type of trade?
- (A) Noting that I have seen.
- (Q) How long do I want to be in this trade?
- (A) I want to be out of the trade in 3 to 4 weeks.
- (Q) How long could I be in this trade?
- (A) As far out as the long options expiration month. (anywhere from 3 to 9 months)
- (Q) How am I going to exit (close the trade?) Plan A (Primary Exit) & Plan B (Secondary Exit)
- (A) See Below...
WMT Just reported earnings last week and all was inline with market expectation:
| 14-May-09 | Guidance | WMT guides in-line |
| 14-May-09 | Earnings | WMT in line |
The Call Calendar can take advantage of this type of stagnant move. So Fundamentally and Technically, I think this trade fits. Now, I would like to be out of this trade by June expiration. I could be out of this trade in a week or a few months (possibly as far out in time as the long calls expiration month (anywhere from 60 to 100+ days, it really depends on the time frame of the long call.)One Question you may have at this point is...
Why a Call Calendar and not a Put Calendar? Isn't the dominant trend bearish for the last year?
That is a great question...Well thank you, I am glad I asked it.
Here is where one needs to take some initiative and based on your own judgment do you think the long term trend, over the last year will continue? OR was the correction set in place back in February? Either trade can work and be profitable, it always comes back to what are YOUR expectations and do YOU have a reasonable exit plan?
My Expectation is that the price will continue to consolidate for the next month or two. Stagnant is the trend. Between 48 and 52.
Premiums are better on the call side verses the puts. Also the sentiment is leaning more bullish...The Put/Call ratio is currently sitting around .63. What does this mean? This basically means that there are more calls being purchased then puts. The number of Puts DIVIDED by the number of calls. Those individuals that are trading Walmart are purchasing the right to buy (Long Call) this stock at a much greater volume then the right to sell (Long Put) This leans more bullish then bearish. This is reason 2 for choosing the Call Calendar over the Put Calendar.
If I am wrong I will have a Adjustment opportunity in place...
THE SET UP:
Sell To Open (STO) 10 JUN 52.50 Short Call
Buy To Open (BTO) 10 SEP 52.50 Long Call
I have set a Limit Order for a Net Debit of $1.40
Last Quote was...
SC = (0.24)
LC = 1.68
Net Debit = 1.44 Using this number is how I will map out my example.
I have decided to use the 52.50 strike for this trade. Why? you may ask... To give me a better probability of the short call expiring worthless. Note: this is will be leaning a bit more bullish than stagnant as far as profitability is concerned.
My Exit Plan WILL be Key!!!
Here is the numbers as I see them at expiration:
| Stock Price | Profit/Loss |
| $45.00 | ($1,118) |
| $47.50 | ($677) |
| $49.75 | $0 |
| $50.00 | $75 |
| $52.50 | $1,186 |
| $55.00 | $237 |
| $55.92 | $0 |
| $57.50 | ($404) |
| $60.00 | ($820) |
Best case scenario would be if the stock moves to $52.50 by June expiration. The short call will then expire worthless, and the long call will increase in value. (How much is determined by DELTA, THETA, VEGA, GAMMA & RHO. Some will have more influence than others.)
...For more information on the GREEKS and how they can effect a trade contact me via email: coachnuge@gmail.com so we can set up a time...
I am not looking for best case scenario here, I would like to get about a 30% Return On my Investment (ROI)
Again Using a net debit of $1.44 per share with 10 contracts this would = $1,440 invested.
1.44 x 30% = 0.43 (round up to 0.45) Just about $450 is all I am looking to make on this trade.
Technically I could set a Credit Limit order once the trade is open so the trade can close on it own with out having to watch it to close. The credit limit order would need to = 1.89 (1.44 + .45) in order to hit my 30% ROI.
My Exit Plan A is this: at anytime the long calls bid price - the short calls ask price = 1.89 I will close the trade. (Unless the limit order took me out already) This will generate about a 30% ROI.
Now we start in with the "What If's"
-What if...the stock stays right at 50, give or take a $1.00?
-What if...the stock turns more bearish below my support?
-What if...the stock takes off bullish above my resistance?
Plan A's are easy. It is the Plan B, C, and D's, Adjustment Plan, or Secondary Exit that keeps me consistent and profitable in any market condition.
With each one of these situations I need to know what I should do and if I can do it. Something I learned a while ago while still studying options is this... Just because I should make a certain adjustment or that is what my notes tell me to do, doesn't mean that I always can.
For more on my exit plans please contact me for a private tutoring session.
Email: coachnuge@gmail.com
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