We’re opening the following Supplemental Trades position this afternoon:
Day limit order
Buy to open 4 JNJ Jan 65 calls
Sell to open 4 JNJ Nov 65 calls
for a net debit of $0.62 or better.
Note that 4 contracts is our base position for calendar spreads. Trading whole-number multiples of the base size ensures that adjustments will not result in unbalanced positions. Also note that matching our Model Portfolio risk profile requires a risk-based allocation strategy—i.e., putting an equal dollar amount into each initial position (prior to any adjustments).
Analysis: JNJ popped more than 1% over the past two days, challenging its April high. This, combined with a downturn in implied volatility, handed us the opportunity to add another position to our portfolio, while trimming our delta risk.
In keeping with our strategy rules, this trade was structured to reduce our portfolio delta, as a proportion of total capital at risk, by about 60%. We’re taking our negative delta/dollar from –11.7% to about –4.6%, and reducing our absolute portfolio delta (assuming equal-dollar risk allocation) by more than 20%.
This individual trade has close to a 46% probability of profit at expiration, as shown in the risk profile below:
When we combine our two open JNJ positions, our odds increase to more than 57%:
Those odds could be reduced by further collapse in implied volatility, but the IV numbers for this particular trade, at 12.3% for the long January position (well under the 12-month low for ATM JNJ options) and 13.2% for the short November contracts, makes vol crush look unlikely. If the bullish mood persists, we can count on the fact that we still have cash available to add an upside hedge position.
NOTE: As a Supplemental Trade, this trade is optional and is primarily intended for more experienced/risk-tolerant subscribers. It will not be autotraded, and it has no bearing on our core newsletter portfolio; however, we will follow up by posting any additional entry or adjustment trades that the Calendar Options risk-management approach may call for. Also note that it’s important for anyone who chooses to participate in Supplemental Trades for a given cycle to follow all Supplemental Trades in that cycle, in order to match our risk-management profile.