ROYAL CARIBBEAN CRUISES: Obstacle Cruise (UPDATE II)
We have not hit the iceberg yet, so why not continue the instructive cruise?
Executive Summary
We celebrate our second trade update, most likely the last.
We again add more credit & time and reduce total risk.
If we are lucky, we can still book a small profit; or we will close with a damage-controlled loss in December or January.
Captain Ahoy!
1. Recap Situation
OK sailors. Listen up. This cruise isn’t over yet. Instead, it is giving us the opportunity for a textbook-style second-degree trade update lesson.
How to roll a trade for the second time on an underlying asset that does not want to look back. As if Royal Caribbean Cruises never came across the concept of mean reversion.
We apply the same concept as the first trade update. We roll into the next month for more credit, time, and reduced risk. If it had not been possible to roll for a credit, we would have either cut the losses and closed the trade or let it run until maturity to get a more positive or more negative result; only the captain knows.
Check out the original BrainDoζer UPDATE below.
2. Why Now?
It is Friday, and we have twenty-one days left to maturity, an excellent opportunity to adjust the trade as long as we reduce risk further by taking in more credit.
3. Trade Execution
First, we go to the tested call side of the trade, pick it up, move it to the next month and drop it on the same strike prices. We never want to change the strikes on the tested side. This usually will show a debit, meaning increased risk.
Second, we go to the untested put side, pick it up, move it to the next month, and drop it. This should result in a credit. We are good if that credit is larger than the tested-call-side debit, resulting in a net credit. If not, we can move the untested put strikes further up and go inverted, meaning the short put is now above the short call. This might give you the overall net credit needed to roll, but it also reduces your maximum profit potential by the length of that inversion.
More Magic for the Pro-Doζer: Only roll the short put into the next month and do not touch the long put to maximize net credit. There are still twenty-one days left for the long put to protect against a potential crash in the asset.
The risk-defined straddle turns into an inverted risk-defined strangle.
3.1 Trade Entry - Oct 7, 2022
Total: 5.25 Credit.
RCL: Pay-Out Graph Short Strangle (Risk-Defined) - Sell To Open.
3.2 Trade Update - Nov 1, 2022
Total: 6.60 Debit.
RCL: Pay-Out Graph Long Strangle (Return-Defined) - Buy To Close To Roll Into Next Month.
Total: 7.70 Credit.
RCL: Pay-Out Graph Short Straddle (Risk-Defined) - Sell To Open To Roll Into Next Month.
3.3 Trade Update II - Nov 25, 2022
Total: 8.80 Debit.
RCL: Pay-Out Graph Long Straddle (Return-Defined) - Buy To Close To Roll Into Next Month.
Total: 9.60 Credit.
RCL: Pay-Out Graph Short Inverted Strangle (Risk-Defined) - Sell To Open To Roll Into Next Month.
The new total net credit of this rolled trade is
Trade Update: (5.25 - 6.60) + 7.70 = 6.35 Trade Update II: (6.35 - 8.80) + 9.60 = 7.15
The new risk or capital employed for this rolled trade is
Trade Update: (-5.25 + 6.60) + 2.30 = 3.65 Trade Update II: (-6.35 + 8.80) + 0.40 = 2.85
Even though the total net credit has been increased, the maximum profit potential has been reduced to 7.15 - 5.00 = 2.15 due to the five-dollar inversion of the short put strike.
Active damage control at its best. There is still a slight chance to turn some of the 2.15 credit into a profit, but the main goal is to control the damage and potentially get back some of what has been lost so far.
Captain Ahoy!