Turning a Short-Term SLV Trade into a Long-Term SLV Trade

  • SumoMe

In this article I highlighted an example trade that involved buying March call options on ticker SLV based on the idea that SLV price action had formed a “multiple bottom.”

In this follow up article I highlighted one possible adjustment to the original trade, albeit one that was very premature and – as the article stated – which forfeited a great deal of upside potential.

(See also The Directional Condor)

Since the original article SLV has risen from $13.17 to $14.59 a share and the March 12 call option has risen from $1.34 to $2.57.  Based on an original 18-lot and a risk of $2,412, this trade has gained $2,286 in value, or +95%.  See Figure 1.

(click to enlarge)0Figure 1 – Updated SLV March 12 call trade (Courtesy www.OptionsAnalysis.com)

If you held this position and are still expecting SLV to continue to rally further between now and March option expiration there is no need to “do something” at this time.  But the point of this article is simply to highlight the possibilities available to you when you trade options.  So let’s look at one (of many) potential adjustments to the original trade given the recent run up in the price of SLV.

Adjusting to Lock in Profit and Buy (a lot) More Time

So here is the adjustment:

*Sell 18 SLV March 12 strike price calls @ 2.57

*Buy 10 SLV Jan 17 15 strike price calls @ 1.42

*Sell 10 SLV Jan 17 22 strike price calls @ 0.22

Executing this adjustment results in the position displayed in Figures 2 and 3.0aFigure 2 – Adjusted SLV trade (Courtesy www.OptionsAnalysis.com)

0bFigure 3 – New Risk Curves for Adjusted SLV trade (Courtesy www.OptionsAnalysis.com)

Pros:

*A minimum profit of $1,014 is locked in (versus a risk of -$2,412 for the original trade)

*This trade has 347 days left until expiration (versus only 39 days for the original trade)

Cons:

*If SLV continues to rally between now and March option expiration this adjusted trade has much less profit potential (original trade has a Delta of 1773 so will make roughly $1,733 if SLV rises another $1 per share.  The adjusted trade has a Delta of 408 so will only gain $408 if SLV rises another $1 per share).

Summary

Option trade adjustments are something of an “art” rather than a science.  A trader is compelled to rate their priorities for any given situation.

For example:

*If you feel strongly that SLV is going to continue to push higher (or at least not reverse sharply) between now and option expiration then holding the original trade offers the greatest profit potential

*On the other hand, if you prefer to give SLV more time to move higher and/or you want to eliminate the risk of loss on the trade, then the adjustment highlighted here might make sense.

The keys are to:

*Calmly and rationally consider your priorities

*Take the proper action (or no action at all depending on your priorities)

*Do not beat yourself up if your choice ultimately proves not to be optimum

When it comes to trading as in life – paraphrasing here – “Stuff happens”

Jay Kaeppel

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