Executive Summary
TWTR’s share price plummeted, and so did the 55 Call Jan 2024.
The overall situation stays volatile.
Trade exit with a 50% return on capital is fair.
1. Recap Situation
Three weeks ago, I was ranting about the stock promoter and Amber Heard supporter victim Elon M., better known for his Tesla enterprise, front-running a Twitter Long I just had engaged in. Not a bad move to use his, back then, P/E GAAP (FWD) 120x valued Tesla stock sales to go shopping and secure some free speech. With Jack D. out of the way, a realistic endeavor, in my opinion.
I highlighted four potential scenarios of how this transaction might go down. In all four scenarios, it was reasonably safe to say that any Call option above the offered 54.20 price per share should be worthless. However, the 55 Call option in Jan 2024 was still richly priced with 2.04, so we sold it and hedged the trade by going long the 55 Call in Sep 2022 for 0.69. As a result, we collected a total credit of 1.35.
If Elon only knew that 4/20 was Adolf H.’s birthday, he could have offered a lower price, to begin with, but I guess you got to pay up to keep your gamer humor on and your stoner friends impressed. Never easy to get rid of that stable odor.
2. Why Now?
There is never a clear right or wrong when it comes to timing, but the easy money has been made. The stock price has plummeted, and so has the value of Call 55, Jan 2024.
In addition, it is a good rule of thumb to take money off the table when a 50% return on capital has been hit - at least in the world of option premium sales. Usually, the capital can be used more efficiently in new situations.
The 55 Call Jan 2024 is down more than half to 0.90, and our front-month hedge 55 Call Sep 2022 still has a value of 0.22.
3. Trade Execution
Trade Entry - Apr 27, 2022
Short Call 55, Jan 2024: 2.04 Credit.
Long Call 55, Sep 2022: 0.69 Debit.
Total Credit: 1.35.
Trade Exit - May 18, 2022
Long Call 55, Jan 2024: 0.90 Debit.
Short Call 55, Sep 2022: 0.22 Credit.
Total Debit: 0.68.
The absolute return of that trade is
1.35 - 0.68 = 0.67
The capital used on that trade is 1.351, resulting in a return on capital of
0.67 / 1.35 = 49.6%
This is an estimation; for this particular trade, our broker does not disclose the capital used anymore, and we did not take a screenshot at the time. Usually, capital employed is as much or less than entry credit received.