Sometimes, a trade can be a three-act drama. Whether it be a tragedy or a comedy, however, is out of the trader's hands.
In Act I, priceline.com Inc. (PCLN) showed up on my radar on Sunday, the day before earnings were to be released, after the markets closed on Monday. Should I open a position that day and possibly face a negative surprise? Or wait until after earnings and miss out on a possible positive surprise?
In Act II, I decided half an hour before the markets closed to open a bull position, but to hedge it by making it a bull put spread, which limits both my gain and my losses.
Act III was the earnings release, and it turned out to be a positive surprise. The consensus estimate was earnings of $4.97 per share. Earnings actually came in at $5.33 per share, a 7.2% surprise.
The price this morning opened with a 8.3% gap up from Monday's close. Analysts are raising targets. Champagne corks are popping. Confetti. Happiness and joy. Happy ending. It's a comedy.
Briefly, in terms of the options structure:
I sold a $370 strike put and bought a $360 strike put for a $380 credit. At expiration, I'll realize maximum profit if the price is above $370, and max loss if it is below $360.
Since we're not at expiration yet -- the options expire Dec. 17 -- my current gain is about $130 below maximum profit. Still a good win, but not yet at the max.
A short vertical spread, like the one I hold on PCLN, benefits from the time decay of options. The longer I hold it, all else being equal, the more it's worth.
So I'll continue to hold the position unless I get a bear signal. I use Person's Proprietary Signal, but the macd or parabolic sar would be just as good. I won't wait for confirmation of any sort -- I use the on-balance volume -- but will lock in profits immediately upon the signal.