As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.
Trade Alert – (HPQ)
Sell the August, 2012 (HPQ) $14-$18 calls spread at $3.65 or best
expiration date: August 17, 2012
Portfolio weighting: 25% = 70 contracts
This was a bet that the Hewlett Packard shares (HPQ) will not trade under $17.65 by the August 17 expiration. We have just seen a massive 100 point rally in the S&P 500 in which (HPQ) has not participated at all.
If a stock cannot go up when good news is dumped on it, it will certainly go down when it sees bad news. In any case, we have already taken out 140 performance points, or 57% of the potential profit on this trade from taking in nearly a month of time decay. So the risk/reward is no longer attractive.
I prefer to free up the 25% of capital I devoted to this trade so I have dry powder when the markets start going down again. We are going to have a wealth of opportunities to choose from this summer.
Your profit on this trade should be ($0.20 X 100 X 70) = $1,400. That will add 1.40% to the value of our notional $100,000 model portfolio.
These are the specific trades you should execute to unwind this position:
Sell the August, 2012 (HPQ) $14 calls……………at $7.05
Buy to cover the August, 2012 (HPQ) $18 – calls at $3.20
Profit: $3.85 – $3.66 = $0.20