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You may remember back in December we looked at a Calendar trade on Woolworths (WOW) based on our outlook from Kevin Rudd’s bonus payment. We did in fact have a small rally and then a pullback and now another rally, but overall the trade has performed well. It’s now time we did something with the trade to lock in a profit.
But what? Well we now have another stimulus package and bonus looming so let’s see how we might adjust the trade.
The first adjustment is to simply close the trade and take our profit. As of the February 24, with February options expiration just 2 days away, the February $28 Calls are trading at 30 cents and the March $28 Calls are at $1.04.
We can simply put in an order to sell the spread for a credit of 74 cents and walk away with a nice profit of 39 cents ($390 per contract, 39x1000 shares). This is better than a 100% return on our risk, but is there another way to lower our original investment and still stay in the trade?
Say we’re still bullish on WOW, based on Kevin’s new bonus payments and our own Elliott Wave analysis. This shows that WOW is in a current Elliott Wave 3 Up pattern, with an expected retracement. However, given that the Oscillator is now starting to turn positive and the stimulus package is through parliament, I believe that the Wave 3 could extend higher for a bit longer. See chart 1:
click to enlarge
So, given that we’re still bullish on WOW, let’s look at a different type of adjustment. We can also turn the trade into a March, vertical spread. To do this, we simply buy back the February $28 Call and sell a March $29 Call for a credit of 25 cents. This creates a March, Call debit spread where we still own the March $28 Call and have now sold the March $29 Call. This lowers our overall risk to 10 cents and increases our maximum profit potential to 90 cents.
Chart 2 shows an OptionGear risk graph of the trade with this adjustment, taking into account having bought back the February $28 Call option.
click to enlarge
There is only one question we need to ask ourselves. Do we want to secure our current guaranteed profit of $390 per contract if we close the trade now, against a possible loss of $100 per contract if we make this adjustment to the trade and we’re wrong?
However, the upside is we could increase our profit from $390 to a maximum of $900 per contract if we’re right.
Remember, you always have options,
Ken Paddison
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