Pulling the Ripcord on United

Delta announces that revenues grew by only 2% in the last quarter, so of course, they trash United Continental Group (UAL), taking it down 11% from the recent high.  As a former pilot myself, I always allow an extra safety margin separating me from a catastrophic event. This time it came in handy, my deep out-of-the-money call spread limiting my losses to a handful of basis points.

Have no doubt this position will expire in the money. But the share price has crossed that line in the sand of the upper strike price on the call spread. Prudent risk control demands that I bail. I am still up 30% in 2013. There is no point in blowing it on a crappy airline that doesn’t even give you free peanuts back in coach anymore. Or so I heard.

The one mitigating factor here is that those who also strapped on the United Continental Holdings (UAL) April, 2013 $34-$36 bear put spread at $1.76 will now almost certainly take in 68 basis points in profit by running it to the maximum $2 value, cutting the loss on the call spread by half. Such is the value of the hedge. If I had gone with a full 10% weighting on the short side, I would have had the luxury of running both positions into expiration.

After sending you 30 consecutive winning trade alerts, it was just a matter of time before one of these bites you back. Notice that the higher prices go, the more often this will happen. Markets get dizzy, squirrely, and punch drunk at high altitude, no doubt from the shortage of oxygen in the form of fresh new cash flows. Let this be a shot across your bow, that we are entering dangerous, even uncharted territory.

Notice also that we lost money an individual name while the main market continued to ascend. That is the double-edged sword of picking a single sector or company. A one off news event can send your prices spilling while everyone else is laughing all their way to the bank. This happened to me last year with Apple (AAPL). You get double the profit with individual option spreads, but with double the risk. Live by the sword, die by the sword.

UAL 4-2-13

3.21.2013 B

Crash and Burn With a United Call Spread