A Follow Up to Lock in Gains; Smile Through Earnings

2 Weeks ago we shared our ideas with you on how to Lock in Gains; Smile Through Earnings using concepts of the RadioActive Trading Techniques.

In that video (You can revisit the archive HERE) we showed an existing position on Canada Goose Holdings Inc. (GOOS)

Initial GOOS RPM

Here was our position as of November 7th:

GOOS currently trading at $61.59

Own 100 shares of GOOS at  $50.93

Own 2019 JAN 55 Put at        $ 8.70

Total Invested =                       $59.63

Guaranteed Exit (Put) =        -$55.00

Max. Risk =                              $ 4.63, or 7.8%

Earnings were coming out on November 14th. We showed a few things we could do with this position…but here is what we actually did (Fusion subscribers saw this live and could follow the position)

Step 1: Lock in Gains

November 7th, 2018. GOOS trading around $61.55:

Sell to Close 2019-JAN 55 Put at      -$3.85

Buy to Open 2018-16 NOV 60 Put at  $4.25

Total Debit for Roll =                            $ 0.40

How do we Lock in Gains by adding to the cost basis?

First, let’s look at a few things:

  1. GOOS After Income Method #3

    Did we lose -$4.85 on the put option? Yes, we paid $8.70 for the initial JAN 55 put and it is now down to $3.85. BUT! We gained $10.62 on the stock. We still have 55% of the gain with insurance in place. Not too shabby…

  2. Did the put go to $0.00? Nope, we still have $3.85 of Extrinsic Value remaining on the JAN put, even though it is now over $6.00 points Out of the Money.
  3. Did we add $0.40 to the cost basis? Yes, our new cost basis for the entire position = stock + put = $60.03…
  4. Did we adjust the Put Strike? Yes! We now own a $60 strike put for 16-NOV expiration, still after the event, which means our at risk is only $0.03 heading into earnings!

This adjustment to the GOOS RPM is Income Method #3 (with a #4 twist), The Bulletproof Vest, a great move heading into earnings.

Step 2:  Now for the Reward

But we are not done yet. We locked in gains, but shouldn’t we reward ourselves with some premium?

We would like to…but we don’t want to cap the gains heading into earnings by just selling a call…

It would add to the risk if we sold an OTM Naked Put or Bull Put spread if GOOS fell after earnings…

So, we looked at another income method from our bag of tricks – Income Method #6 – to generate income and leave the upside open:

Next adjustment:

GOOS at $61.59:

Sell to Open 16-NOV 65 call for -$2.50

Buy to Open 16-NOV 70 call for $1.25

We generate -$1.25 of net credit for this position. Looks like a Bear Call spread, right? Why would I do a Bear Call spread heading into earnings?

Because I own the stock this is simply a covered call (or collar) with an extra bought call that we received at a credit!

We Bulletproof the position to a Guaranteed Profit of $1.22 AND we keep infinite upside profit if GOOS takes off:

The Outcomes:

  1. GOOS Heading Into Earnings

    If GOOS collapses due to poor earnings, we still take a profit. We are guaranteed to get $60.00 back for the stock even if it drops to $50, $40 or even $30 per share or lower.

  2. But, if GOOS has no move, stays at $61.50 or so, we still take a profit.
  3. If GOOS jumps up above $65, we get assigned at $65, the 60 put and 70 call expire, a return of about 10%.
  4. And if GOOS gaps up above $70…the sky is the limit.

Lock in Gains; Smile Through Earnings.

So, what did happen?

GOOS Stock Before, During and After Earnings

At the Open after earnings on the 14th, GOOS gapped up to $72 then pulled back and closed right around $65. The market was weak that day, and I felt GOOS could continue up in the next 2 days to expiration.

What’s the harm in leaving it open with unlimited upside?

So, on Thursday, NOV 15th GOOS did move up and closed at $68.22. Better profit!

And then on Friday, NOV 16th, GOOS continued up slightly and closed at $70.05. A little more profit.

And, we were out of the position…

How Did the Numbers Work?

Well, our shares of GOOS were assigned at $65.00 due to the obligation of the short call.

We Sold to Close the now just ITM 16-NOV 70 call for $0.08.

And the 16-NOV Put expired worthless.

Total Value at Expiration =  $65.08 ($65.00 assigned + $0.08 Sell to Close)

Total Cost =                         -$58.78

Return =                                $ 6.30, or 10.7% on GOOS

And this was the return for the Fusion position. With No Risk heading into earnings and an unlimited upside if it really gapped up.

What else could we have done?

  1. We could have just adjusted the put, kept the risk at $0.03 heading into earnings and had unlimited upside.
    • Then closed the stock on 16-NOV for about $70.00, a profit of $9.97 or about 16%.
    • But, if the stock fell below $60.00 at earnings, we would have had a loss of -$0.03.
  2. We could have liquidated on NOV 7th:
    • Sell to Close stock at $61.55
    • Sell to Close Put at $ 3.85
    • Total Liquidation Value = $65.40
    • Original Cost Basis = -$59.63
    • Profit prior to earnings = $ 5.77, or 9.7%
  3. We could have done nothing, left the cost basis at $59.63 and closed out at around $70
    • Would have been a $10.37 profit, or 17.4%…
    • But could have lost -7.8% if GOOS fell below $55 at earnings.

I feel we made the right choice: Locked in Gains, took in some extra profit for reward, had no risk through earnings and took a 10.4% return with the Income Methods. Thanks to the Bulletproof Vest (IM #3) and a Riskless Spread Trade (IM #6).

What are your thoughts?

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