Tuesday, August 17, 2010

*UPDATE Perfect World (PWRD) - Closing the Trade


PWRD is trading $23.75, down 4.3% with IV30™ down 11.1% after earnings. The LIVEVOL™ Pro Summary is below.

The post yesterday is here: Perfect World (PWRD) - Earnings Play on Elevated Vol

Yesterday we did this:
Trade Stats
Sell 1 PWRD Aug 25 call @ $0.90
Sell 1 PWRD Aug 25 put @ $1.10
Buy 1 PWRD Aug 26 call for $0.50
Buy 1 PWRD Aug 24 put for $0.65
Total credit = $0.85. The max loss is $0.15. MaxGain/MaxLoss is 5.67:1. If the stock stayed in the range ($24.15, $25.85) by expo, the trade would have been a winner ex-commissions. The implication is of course, the odds of the stock staying in that range are worse then ~ 1:5 (ok, so I'm being very rough). This is a trade with a higher likelihood of loss than gain.

Today we see the stock did in fact move out of the range. There is a way to get out for even, which I've already done.

The updated Options Tab is below:

Trade Stats
Let Short PWRD Aug 25 call expire worthless (hopefully)
Buy 1 PWRD Aug 25 put for $1.65
Sell 1 PWRD Aug 26 call @ $0.05
Sell 1 PWRD Aug 24 put @ $0.75
This yields a $0.15 credit; so break even (but of course commissions are a loser). I actually put the trade on for $0.20; so I lose the $0.05.

Was a long shot, but I felt the payoff was better than the odds. Holding this position is perfectly reasonable as well, waiting to see if the stock does make it into the "profitable" range.

This is trade analysis, not a recommendation.

Legal Stuff:


  1. What plan do you have in case unexpected move of the stock price towards 25-ish?

  2. Completely agree, it does not make a lot of sense, whatever profits (if any) will be eaten by transaction costs.

  3. They are running it up now to the 25 strike. Slick. I chose to close the put side of this condor and let the call side expire. Of course, now it's time to see if I can take the heat I guess...

  4. Same boat Mike; if it makes you feel any better. Shoulda closed, I know I shoulda closed, I knew then I shoulda closed... But, I didn't....

  5. I would be really scare to hold it into expiration as of now...

  6. It's just trading; no biggie. Not a great decision, but it looks like it will work out fine. Will close at 12:58 PST prob.

  7. Ophir,

    Why pinning occurs at the first place? I understand that it's not always the case but pretty regular for many stocks. What's the main driving force? Thanks!

  8. A pin can occur if the ATM strike has large long interest in both the calls and the puts.

    When the stock is below the strike the gamma from the long puts gets holders short delta, so they buy stock. This forces the stock up.

    When the stock moves up past the strike, this gets the long call holders long delta through gamma, so they sell stock.

    These forces work together to "pin" the stock at the strike.

  9. Thanks
    Are you playing this behavior? Like selling straddle at the day of expiration with strike where probable pin may occur?

  10. Very rarely. I don't actually buy into the strike pinning theory unless OI is really large. Also, as I'm generally short options, I have no long gamma to scalp :-)