PCLN Credit Spread Look Back Trade

PCLN – 07/14/2016

So what happens when one of these short term momentum trades go horribly wrong? Well that is what this trade is all about. Keep in mind that I understand the risk when I enter these. To get the premium you need for a trade designed to last less than 48 hours you have to have a volatile stock. That means it can move quickly in either direction for a variety of reasons.

On 7/14 I determined based on momentum that PCLN was in a uptrend that I should be able to count on at least for the next 24 hours. With PCLN trading at $1347.58 I bought five contracts of the July week 3 $1315 Put and sold the July week 3 $1320 Put for a net credit of $0.28 or about $140.00 before commissions. My initial risk was about $2,380 so I was looking at a return of 5.9% if PCLN stayed above $1320 at close. My order to sell filled in two different orders as you will notice on the sheet. You do not always get filled all at once.

On 7/15 PCLN opened with a gap down of $27.00 to about $1321.00, only one point away from my short and I was already in panic mode. Almost no way to adjust once the stock has moved that far against you without heavy losses. The rest of the market was trading up, so I had confidence (hope) that PCLN would recover. There was no identifiable reason for the gap down.

When PCLN had recovered to $1324 I decided to purchase one July week 3 $1325 Put and sell one of my $1315 Puts to offset that some. Now I no longer have a true credit spread but a weird butterfly type credit spread (not really, just letting you know how this trade was starting to get complicated). As the day continued I decided to sell the $1325 Put I had purchased and use the proceeds to repurchase one of my initial $1320 Puts which reduced my overall risk and left me with four open contracts trading.

PCLN started down again so I decided to purchase another July week 4 $1325 Put (chose week 4 instead of 3 to reduce time decay) and sell one of my $1315 Puts to offset the price of that one just as I had done above. Next I decided to repurchase another of my $1320 Puts and roll it to the July week 4 $1317.50 Put. Now my short term 24 hour trade was getting moved to next week piece by piece.

My next step was to close my remaining July week 3 positions. I sold the remaining three $1315 Puts and repurchased my outstanding three $1320 Puts. My final act on 7/15 was to repurchase my $1317.50 Put and sell a July week4 $1330 Put leaving me with a Bull Put Debit spread of $1330/$1325.

Between 7/18 and 7/22 I missed two opportunities to exit this position. One would have given me a net $100.00 loss and the other a $416.50 loss. I passed on both of them ignoring my rule to get out as soon as you can once you have to defend. The $100.00 loss would have been more than acceptable and I should have taken it, but I was confident that PCLN would finish above $1330 on 7/22 so I waited.

On 7/22 with PCLN trading at $1324 I initially decided to roll the position from July week 4 to July week 5. As the day went on, I came to my senses and followed my trading rules and close the position only losing a little more than I would have if I had just closed it to start with on 7/22 instead of trying to roll. Overall I lost $898.12 on this trade or about 37.74% of what I had risked. Not a good trade but I did learn from it. Two big rules at play in this trade are follow trade rules and stocks do not behave like you think they should, they behave like they do.

Date

Sym

Exp

Stk

Price

Cont

Type

Cost

Balance

PCLN $

07/14/16

PCLN

BTO

7WK3

1315

-$0.69

2

Put

-$144.03

-$144.03

07/14/16

PCLN

STO

7WK3

1320

$0.97

2

Put

$187.97

$43.94

07/14/16

PCLN

BTO

7WK3

1315

$0.69

3

Put

-$209.32

-$165.38

07/14/16

PCLN

STO

7WK3

1320

$0.96

3

Put

$285.68

$120.30

07/15/16

PCLN

BTO

7WK3

1325

-$5.00

1

Put

-$509.42

-$389.12

$1,324.99

07/15/16

PCLN

STC

7WK3

1315

$0.90

1

Put

$80.27

-$308.85

$1,324.00

07/15/16

PCLN

STC

7WK3

1325

$3.57

1

Put

$351.75

$42.90

$1,324.00

07/15/16

PCLN

BTC

7WK3

1320

-$1.79

1

Put

-$184.25

-$141.35

$1,324.00

07/15/16

PCLN

BTO

7WK4

1325

-$18.58

1

Put

-$1,863.25

-$2,004.60

$1,323.80

07/15/16

PCLN

STC

7WK3

1315

$1.08

1

Put

$102.75

-$1,901.85

$1,323.80

07/15/16

PCLN

BTC

7WK3

1320

-$0.77

1

Put

-$82.25

-$1,984.10

$1,328.00

07/15/16

PCLN

STO

7WK4

1317.5

$12.77

1

Put

$1,271.73

-$712.37

$1,328.00

07/15/16

PCLN

STC

7WK3

1315

$0.14

3

Put

$35.20

-$677.17

$1,331.00

07/15/16

PCLN

BTC

7WK3

1320

-$0.34

3

Put

-$108.80

-$785.97

$1,331.00

07/15/16

PCLN

BTO

7WK4

1317.5

-$9.80

1

Put

-$985.25

-$1,771.22

$1,333.00

07/15/16

PCLN

STO

7WK4

1330

$14.60

1

Put

$1,454.72

-$316.50

$1,333.00

07/22/16

PCLN

BTC

7WK4

1330

-$6.15

1

Put

-$618.02

-$934.52

$1,324.22

07/22/16

PCLN

STC

7WK4

1325

$1.61

1

Put

$157.98

-$776.54

$1,324.22

07/22/16

PCLN

STO

7WK5

1330

$19.62

1

Put

$1,958.94

$1,182.40

$1,324.22

07/22/16

PCLN

BTO

7WK5

1325

-$18.08

1

Put

-$1,810.99

-$628.59

$1,324.22

07/22/16

PCLN

BTC

7WK5

1330

-$19.85

1

Put

-$1,990.25

-$2,618.84

07/22/16

PCLN

STC

7WK5

1325

$17.26

1

Put

$1,720.72

-$898.12

NOTE: I very seldom recommend extreme short term momentum trades to others. I still trade them from time to time but they are not a mainstay of my account. Too much risk versus reward and to difficult to defend unless you are a very good trader and can follow throughout the day. Not a ‘buy and forget’ strategy.

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