It was my turn to post a trade for members of OptionsANIMAL a few weeks ago. I examined several equities on my watch list with that in mind. We had been in an Uptrend from August 14th to September 15th. However, there was a heavy selling day on Monday, September 15th that put the trend Under Pressure. I focused on the Federal Reserve
that week. Their minutes were going to be broadcast during the week, which left me to wait until the event had taken place before I chose my educational trade.
Gilead Sciences, Inc. (GILD) had been trading bullishly since its stage-one-break-out in early July. The earnings (EPS) had been excellent for the past two-quarters, and the next announcement was scheduled for October 28th of this year. The ROE (return on equity), showing the management fiscal responsibility, was ranked at 33% by IBD. The percent held by management was listed at 2% while that held by funds was at 56%. When I viewed the fund ownership on MarketSmith, I saw that eight of those 2852 funds who hold ownership in this equity are in the IBD Top Twenty. The company’s debt is low (below 50%) and their sales are heavy (136% revenue).
With such good news in the fundamental analysis, I was nervous about some news in the technical analysis. The price had already made its goal of 20 – 25% gain from the base buy point, which gave it a label of “extended” by the Can Slim followers. There had been a broad range bar on September 5th that printed a high of $106.50 and a low of $97.54, which was close to the 50-day-simple-moving-average for the second time since the break out. When I examined this price bar, I saw that it closed near the top of the range, at $105.36. The volume on that day was massive: 171% above the average daily volume. That evidence told me that this equity had strong support when sellers were rampant.
Short-term and long-term examination of the GILD put/call ratio told me that the investing community was holding a bullish opinion on this equity. The news from the Federal Reserve had launched the market back into an uptrend. I held a solid opinion that this equity would either continue to go bullishly or at least hold its own over a period of time. When I eliminated any trading strategies that required bearishness, or large movement, I was especially attracted to the Call Calendar, which could reward me even if the price did not change very much! (Theta decay difference between long-term long calls [LC] and short-term short calls [SC] was the attraction.) I chose the strike 110 traditional call calendar in this position, placing the LC to expire in February 2015 and the SC to expire in October (before EPS date).
When I did the math, the 20% reward was at $6.45. I placed a GTC (good till cancelled) order in place to close this trade if and when the units bid price reached that number. My commitment is to look at the price chart every day that the stock market is open. I am familiar with sell signals, and I am comfortable with any adjustments required. I noticed during my open position that the market came under pressure again, then turned into a market correction. Even though GILD slid down in price, the VIX rose from the 12 ish level to almost 18 as a result of the hard general selling.
There was good news in the economic calendar on Friday, October 03, 2014. The numbers from the Jobs data were all encouraging. This spurred a solid bounce in the Dow Jones Industrial Average, S&P 500, and the Nasdaq. In addition, the Call Calendar on GILD caught a bid-fill at $6.45, generating my 20+% gain in just two weeks. The implied volatility (IV) was 38.11% at the opening, had moved up to 41.07% at the close, with a per contract vega of 16.19. A change in IV of +2.96, means that the value of the spread had increased per contract by more than $47.90. GILD was at $106.09 at the open and was at $106.87 at the close. Since that is a small change in price (less than 1%), I see it as proof that the reward was due to Theta decay and IV advance. Options offer benefits with the Greeks. Theta decay and vega rewards are good examples.
Calendars are awesome!