Trade Details & Summary

QCOM Strangle (LIVE Adjusting Trade)

With QCOM now trading above our short strike and break-even point we are making a small adjustment to the position to reduce risk and increase our chance of making money should the stock come back down between now and expiration.

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In this video, we're going to look at making an adjustment to our Qualcomm position which is ticker symbol QCOM. In this case, we got into this short strangle in Qualcomm a little while ago, and we still have 23 days to go until expiration.

There's still time here, but we do need to start thinking about making an adjustment because the stock has breached our short strike to the top side. We originally had the 48 calls and the 37 puts. You can see that was the entire strangle that we entered initially.

We sold this thing for about $95, kept our position size small, but now the position is trading for about 250. At the current moment, we're down about $155, and you can see the reason that that is because the stock is trading up around $50. It's about $2 higher than where our short strike is, or about $1 higher than where our breakeven point is.

Remember, our breakeven point on this trade is about $49 because we take that short strike 48 and we add the credit received. The stock is only trading about $1 above that. We still have a lot of time to go. But again, we can make some adjustments to this trade because it's apparently moving against us.

And then the other reason that we want to make an adjustment is that our short put is serving us no purpose at this point. We sold the short put, the 37 puts for $44. They're now trading for about $5 which is about as cheap as they're going to trade until expiration.

They'll probably expire worthless. We've made about $38 on that side of the trade on that one put leg. And what we want to do is we want to roll up those puts and take in a higher credit and re-center the trade.

Here's a look at the chart here of Qualcomm. You can see it's had just really a excellent random move higher. And what we need to do now is we need to adjust by moving up our puts from where they are to something around 45. That's basically where we're going to target that range.

Now, how do I get to that range? And that's the question that everyone has. Well, here's our position in Qualcomm. And again, our short puts are down here at 37, but you can see there's only probably about a 2%, 3% chance of those ever going to the money at this point now that the stock has moved higher, now that we're a little bit closer to March expiration.

We don't need those right now. We can buy those back. Bank a little bit of a profit on that end of the trade, and we can take a little bit more risk by rolling up to something a little bit closer. In my case, what I like to do more often than not is roll back to the original probability that I set up the trade at.

Most of the strangles that you probably see is some of these live trading videos; we're setting up strangles at about the 15% chance of being in the money on each leg. That means that we're selling puts at about the 15% probability level, selling calls about the 15% probability level.

What I want to do is I just want to readjust that one side to that same probability level. In this case, that ends up being the 45 strikes here, and those ends up also having pretty decent open interest. And the volume is not there today because the market just opened.

It's probably about 15 minutes after the market opened here. There's some decent interest there. We could probably get a fill in there. And again, it also gives us some room in case the stock does move down. One of the downfalls of making adjustments or one of the hard parts about making adjustments is that you don't want to adjust too far too fast.

And with 23 days to go, there's still a lot of time for this trade to come back in. My opinion is you always want to make slow adjustments. You can always adjust it further up the chain, meaning you can adjust it from the 45s to the 47s to the 48s, etc.

I always like to make slower adjustments. And the way that I do that is just by using this probability as my guidepost because this is going to change as we get closer to expiration and help me become more systematic and methodical about how I make adjustments.

In this case, what we're going to do is we're going to go ahead and sell the 45s. We're just going to left-click on the 45s there. And on my keyboard, you can just hold down CTRL. And that's on a Mac. I think you can do pretty much the same thing on a Windows.

And we're going to go ahead and buy the 37s. What we're going to end up doing is using a credit spread or a vertical spread order to facilitate this roll. We're going to sell out another 45 put. We're going to roll up to the 45's, and we're going to buy back our 37 puts and close those out.

Now, the net difference between those two right now like fair market pricing is around $29. We're going just to move it up to $30, stretch it here a little bit. Now, let's analyze this trade here as well because I want to look at this, so you guys can see what we're looking at. Let's do pre-adjustment here.

I'm going to toggle this off on our Thinkorswim screen. And you can see this is our risk profile here for the call composition. This is our strangle that we have around the stock. The stock is trading all the way up here, and you'll notice that this is our strangle. It's made a pretty big move.

Now again, what we don't want to do is we don't want to adjust the call side of this trade. The stock is already moving against us to the topside. There's no point to rolling this out just to see the stock then move even higher and compound our losses on the topside.

I never liked to do that. Instead, what I want to do is I want to take this profitable side. We're going to close out of this put, and we're going to reenter a new put at 45. And what you're going to see is that now our breakeven point is just going to move out a little bit further by the amount of the credit that we received.

Once I toggled this position on, now you can see that our new strangle in Qualcomm, although we're still losing a little bit of money here, our breakeven point moved out another $.30 and gave us a higher credit which reduces our overall risk in the trade.

We still leave an opportunity for the stock to come back in. That's all we can do at this point. We can't over-adjust it. I still want to leave enough range for the stock to come back in. We've got enough movement here that if the stock trades anywhere between 49 1/2 and 43 1/2, we end up making money.

And again, this is a good adjustment that you can make early in the cycle. If we were closer to expiration, we might be a little bit more aggressive and roll up to maybe the 46 or the 47 strike.

But I like going to the 45 strike here because that gives us, like I said, a nice little range where if the stock does end up falling back in which it absolutely could because it's done it a million times before in the past, that it leaves an opportunity for us to take some money off the table and bank a profit here.

We're going to go ahead and put this order in. We're going to hit confirm and send. You can do it right from this order dialog box and see if this trade gets filled. Now again, we placed our order just a couple of cents above where the market was trading, and you can see the market is just starting to adjust, the market makers are starting to see the orders come through and try to bait us in.

But we're going to hold firm here at a $30 credit, see if we can get filled here later on this afternoon. I'll pause this video for now. We'll come back later on, same day, see if we can get filled whenever that ends up happening.

Alright, we're back here, not even a couple of minutes after we entered that order here for Qualcomm and you can see we got filled at that net credit of $30. That new order is filled. Now, that brings our total credit to around $130 for Qualcomm.

Again, the stock is moving down today, so it's good. And again, our whole goal here is just to start making adjustments to the position and still leave some room for the stock to come back down. We don't want to over-adjust in this case.

But hopefully, this was a good example of how we can adjust a short strangle position that starts to move against you to reduce the risk and help re-center the trade basically wherever the stock is trading right now.

As always, I hope you guys enjoy these videos. If you have any comments or questions, please let me know in the comment section right below. And until next time, happy trading!

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